Freelancers' Questions: Now they're staying, what are Class 2 NICs?

Freelancer’s Question: As an aspiring sole trader, I’m trying to get my head around this FreelanceUK article but aren’t entirely sure what Class 2 NICs are, or what the significance of them being retained in the tax system is? 

Expert’s Answer: The self-employed currently pay two types of NIC, depending on their profits. They pay Class 2 contributions of £2.95 per week if their annual profits exceed £6,205 and they also pay Class 4 NIC at the rate of 9% on profits above £8,424. Once profits reach £46,350, Class 4 NI contributions fall to 2% on the excess profits.

Class 2 contributions may also be paid voluntarily by self-employed people who earn less than the threshold – and many choose to do so as it gives them rights to various state benefits, most notably the state pension.

The government had planned to abolish Class 2 NIC and instead change the rate and threshold for paying Class 4 NIC. Those Class 4 contributions paid or credited would then count towards state benefits.

Unfortunately, under the [government’s recent consultation] proposals, Class 4 contributions could not be paid voluntarily and the lowest earning self-employed person would instead have had to pay Class 3 NIC at the rate of £14.65 per week (compared to Class 2 at £2.95 a week) if they wanted to maintain rights to certain state benefits including the state pension.

The expert’s answer is based on guidance by tax charity the Low Incomes Tax Reform Group.

 

18th September 2018

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