Chancellers assist the self employed in the Hitchin area in understanding National Insurance and the upcoming changes to the regime. Here, we outline some of the basic principles...
The 2016 Budget confirmed the government's intention to abolish Class 2 National Insurance contributions (NICs) from April 2018. This means that instead of paying two classes of NICs (Class 2 and Class 4), the self-employed will pay just one in the future.
Class 2 NICs currently provide the self-employed with access to a range of state benefits:
- the Basic State Pension
- Bereavement Benefits
- Maternity Allowance
- Contributory Employment and Support Allowance
To ensure that the self-employed can continue to access these benefits through the NICs system, the government has issued a consultation to consider how self-employed individuals could build entitlement through Class 4 NICs.
Class 2 NICs
Class 2 NICs are currently flat-rate weekly contributions (£2.80 per week in 2016-17). They are paid through self assessment alongside income tax and Class 4 NICs if the person's profits for that tax year equal or exceed the Small Profits Threshold (£5,965 per annum in 2016-17).
Payment of Class 2 is voluntary for those with profits below this level.
Class 4 NICs
Class 4 NICs are paid by the self-employed on net profits that are subject to income tax. They are payable at a rate of 9% on profits between the Lower Profits Limit (£8,060 in 2016-17) and Upper Profits Limit (£43,000 in 2016-17), and 2% on profits above the Upper Profits Limit.
They do not currently provide entitlements to contributory benefits. Class 4 contributions were introduced so the self-employed would pay a fairer share of the costs associated with providing contributory benefits.
The way ahead
In the 2016 Budget, the government confirmed it will reform Class 4 NICs, so that self-employed individuals continue to build entitlement to the State Pension and other contributory benefits, following the abolition of Class 2 NICs. The government will set out its plans for the contributory benefit tests in the near future.
If you are in the Hitchin area and require advice on national insurance contributions, please contact us.