NIC Reform for the Self-Employed

Big changes are on the way for the self-employed and their National Insurance contributions. As of 6th April 2018, class 2 NI contributions are to be abolished and class 4 contributions will be reformed. The existing contributions provide the means by which the self-employed earn an entitlement to the state pension and to certain contributory benefits.

The self-employed currently pay two classes of National Insurance contribution, class 2 and class 4. By law, a worker is obliged to notify HMRC when self-employment begins, and again when it ceases. Registering for National Insurance contributions can be done at the same time as registering for tax. The necessary form, the CWF1, can be completed entirely online, or filled in electronically, printed and submitted via post. The applicant must have an NI number before completing the CWF1 form.

Class 2 Contributions

These contributions are payable for each week of self-employment, from age 16 to the state retirement age. The weekly rate for class 2 contributions is set at £2.85 per week for the 2017/18 period.

Liability to pay class 2 contributions only arises when a worker’s profits from self-employment fall above the small profits threshold (£6,025 for 2017/18). In the instance that profits fall below this threshold, the worker is still eligible to pay, but no longer liable. The worker will still have the option to pay these class 2 contributions voluntarily.

Although calculated using a weekly rate, class 2 contributions are now paid in an annual lump sum and must be paid by 31st January following the end of the tax year to which they apply. For example, class 2 contributions from the 2017/2018 tax year must be paid by 31st January 2019.

When calculating a worker’s annual liability for class 2 contributions, weeks of self-employment include those where the worker was on holiday, or where they had no work, but were available to work, as self-employment does not cease during these periods.

Liability for class 2 contributions comes to an end in the week in which the worker reaches state retirement age, although it could remain beneficial, depending on the worker’s contribution record, to continue paying the contributions voluntarily until the end of this tax year, such that it still counts as a qualifying year.

Class 2 contributions earn the worker entitlement to a state pension, maternity allowance, bereavement allowance, and contributory employment and support allowance. This contributory role of class 2 will move to class 4 as of 6th April 2018, where class 2 will officially and technically be abolished.

Class 4 Contributions 

Class 4 contributions currently function similarly to the income tax, in that they do not confer any entitlement to a pension or other benefits. Class 4 contributions are payable at a rate of 9% of earnings between the lower and upper profit margins. For 2017/18, the lower limit was set at £8,164 and the upper limit at £45,000. There is an additional rate of 2% on earnings above the upper profit limit.

Much like class 2, class 4 contributions are payable via an annual self-assessment and are due on 31st January after the end of the tax year to which they apply.

The Future 

Following the abolition of class 2 as of 6th April 2018, class 4 contributions will become the means by which the self-employed accrue entitlement to a state pension and the other relevant benefits. The reformed class 4 contributions system, as outlined the government, so far seems to resemble the class 1 system, as applied on a basis of annual earnings.

Phebys – Accountants in Cambridgeshire

If you are self-employed and are looking to find out what these NIC reforms will mean for you, do not hesitate to call Phebys Accountants on 01480 896267, or email, and we will be more than happy to advise you.

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