"Are postponing the merger of Class 2 and Class 4 National Insurance Contributions and the likely abolition of Self-Employed Class 2 NICs what you can call progressive tax reform?"
Introduction
Class 2 Self Employed National Insurance Contributions (NICs) was due to be abolished from 6 April 2018 and due to merge with Class 4 NICs (paid by self-employed people on profits). However, both abolition and merger have been postponed until 6 April 2019. But what stands out about this story, for me, is not so much the debacle over NICs for the self-employed, but the way it makes the benefits of incorporation stand out as the more sensible and attractive business model!
![Postponement of Self Emp NIC Merger Postponement of Self Emp NIC Merger](https://res.cloudinary.com/viditdns/image/upload/v1533820518/assets/img/blog/postponement-of-self-employed-nic-merger.png)
Why the Delay?
The government justified the delay of the reform to NICs by announcing that a more thorough consultation with interested parties was needed. Why, you do wonder, does the government wait until the eleventh hour before announcing the delay; anyway, the point is that the government is consulting on the likely impact of the abolition of Class 2 NICs on lower earners and meanwhile the merger/postponement has been delayed.
Relevance of Class 2 NICs for the Self-Employed
Self-employed people whose profits are below the small profits threshold (£6,025 for 2017/18) are currently able to protect their rights to the state pension and certain other state benefits by voluntarily paying voluntary Class 2 NICs c (currently at £2.85 per week). As it’s estimated that 967,000 self-employed people earned below the small profits threshold in 2015/16, the abolition of Class 2 NICs is a significant issue, particularly as the self-employed are not eligible for a workplace pension either—and there is yet another benefit of incorporating a sole-trader business!
For self-employed people whose profits fall in between the Class 2 and Class 4 threshold (£8,164), they’ll pay Class 2 NIC of £148.20 p.a. in order to gain a full year’s NICs credit. Paying class 4 NICs is currently purely a tax on profits and does not provide any NICs credits. This means that some self-employed people will pay £150 more than they bargained for over the next tax year.
Who loses out after abolition of Class 2 NIC for the Self-Employed?
The real effect of the delay and the likely effect of the abolition after 2018 will depend on the income bracket of the self-employed person:
Self-employed people earning more than £6,025 p.a. won’t have to pay Class 2 NICs any longer, yet will still benefit as if they’d contributed for the purposes of gaining access to contributory benefits; these lucky taxpayers will still qualify for the state pension and other benefits and will save £148.20 p.a.
Self-employed and earning less than £6,025 p.a. won’t be able to voluntarily pay Class 2 NICs any longer in order to qualify for the state pension and other benefits. In order to continue to qualify, these self-employed people will need to pay Class 3 NICs instead, which will cost £741 p.a. instead of £148.20 p. a. This means that the lowest paid will end up paying £592.80 p.a. extra.
Conclusion
Government consultants, no doubt, are looking at some of these anomalies with some urgency, as the planned changes do not add up to a progressive tax reform in my book! I’ll put my money on the issue of Class 4 NICs coming up somewhere in the Chancellor’s Budget on 22 November. I wouldn’t be surprised if Phillip Hammond announces Class 4 NICs are to rise by a percentage point or two. Watch this space on 22 November for further comment.
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