24 Sep 2018
Class 2 national insurance contributions (NICs) were due to be abolished in April 2019. However, the government has now announced that Class 2 NICs will not be abolished during this Parliament.
NICs were originally created as a form of insurance against illness and unemployment, and to provide for a State Pension and other benefits. First introduced via the National Insurance Act 1911, they have since gone through numerous reforms, with some more recent approaches aimed at aligning them with the income tax regime.
Plans to scrap Class 2 NICs were first mooted in the 2015 Summer Budget, with the stated aim of simplifying the tax system, but the measure was later postponed from April 2018 to April 2019. It has now been scrapped altogether.
Class 2 NICs are currently paid at a rate of £2.95 per week by self-employed workers who have profits above £6,205 a year. The abolition of Class 2 NICs would have meant that instead of paying two types of NICs, the self-employed would only have had to pay one – Class 4.
However, the proposal to scrap Class 2 NICs raised some additional concerns, particularly for those who are self-employed and have profits below the current earnings threshold, who could struggle with contributing towards future state benefit entitlements under the new regime.
Class 4 NICs are currently paid by self-employed workers who have profits above the lower profit limit (LPL), which is £8,424 in 2018/19. The Class 4 NIC rate stands at 9% on profits between the LPL and the Upper Profit Limit (UPL), and 2% on profits above the UPL of £46,350 in 2018/19.
Class 2 NICs allow for those who are self-employed to voluntarily pay Class 2 NICs, even if they don’t reach the earnings threshold. This works out to be more cost-effective than paying Class 3 NICs, which may have been the alternative if Class 2 NICs had been abolished. Class 3 NICs are payable at £14.65 a week for 2018/19.
Reaction to the decision
The feedback on the government’s decision not to scrap Class 2 NICs has been mixed.
In a written statement to MPs, Robert Jenrick, Exchequer Secretary to the Treasury, stated that eliminating Class 2 NICs would have introduced ‘greater complexity’ to the UK tax system.
However, Mike Cherry, National Chairman of the Federation of Small Businesses (FSB), said: ‘The move is extremely disappointing and flies in the face of tax simplification.’ He argued that the Treasury ‘should have worked harder to develop more effective ways to protect around 300,000 low-earners and maintain their contributions for the State Pension’.
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