Changes to National Insurance Contributions
From 6 April 2018, the Class 2 NIC is going to be removed. Currently, the self-employed paying this contribution are charged a weekly flat-rate to receive contributory benefits. This is alongside Class 4 NICs on profits which are above the Lower Profits Limit, however, Class 4 NICs do not currently give access to contributory benefits.
At present, the self-employed whose profits exceed the small profit threshold of £5,965 (SPT) pay Class 2 NI contributions of £2.85 per week towards their state retirement pension and entitlement to contributory benefits. Should profits drop below the threshold, Class 2 contributions can be paid on a voluntary basis.
The growing concern here is once the Class 2 contribution is abolished, payment of Class 4 contributions will count towards state pension and benefits instead. These contributions will not be taken until profits reach £8,060, and no voluntary contributions can be made.
Class 4 NI contributions cannot be paid on a voluntary basis meaning that the only way that self-employed people on profits below the Class 4 threshold will be able to build up a contribution record, if they did not obtain NI credits through receipt of other benefits, eg tax credits, child benefit or Universal Credit, will be by paying Class 3 voluntary contributions at £14.10 a week.
However, if profits exceed the SPT, the self-employed will be given Class 4 credits, so they will be treated as making contributions even though none was actually paid.
Anthony Thomas, Chairman of the Low Income Tax Reform Group commented:
‘Some parts of these proposals are good news for self-employed workers on low earnings, but by no means all. Those with profits between £5,965 and £8,060 will be better off because they will pay no NI but be credited with contributions. Our concern is for those with lower earnings than £5,965 who would have to pay voluntary Class 3 contributions in the future to protect their benefits entitlement if they did not obtain NI credits through receipt of other benefits, for example tax credits, child benefit or Universal Credit. Class 3 contributions will cost almost five times the amount they are paying now (£14.10 per week compared to £2.85 per week) and may mean the cost is unaffordable, leading them to rely more on means-tested benefits in the future.’
Reference: GOV.UK policy paper Low income tax group