National Insurance changes for sole traders

In the 2015 summer budget, the government announced that Class 2 National Insurance contributions (NICs) would be abolished and changes would be made to Class 4 NICs. This was as a result of recommendations made to simplify the current system. From April 2018, those changes will come into effect.


Who will be affected?

These changes affect the self-employed and people running their business as a sole trader or partnership.

The current system

National Insurance (NI) are contributions that are paid by workers and employers to the government, enabling them to qualify for certain state benefits.

Employees and their employer pay Class 1 NI contributions as part of the Pay As You Earn (PAYE) scheme.

Self-employed workers currently pay Class 2 NI (a weekly set amount if they earn over £6,025 a year) and Class 4 NI (if earnings are over £8,164 a year).

The table below shows the benefits that each class is entitled to. Class 4 doesn’t usually count towards state benefits.

Benefit Class 1: employees Class 2: self-employed Class 3: voluntary contributions
Basic State Pension Yes Yes Yes
Additional State Pension Yes No No
New State Pension Yes Yes Yes
Contribution-based Jobseeker’s Allowance Yes No No
Contribution-based Employment and Support Allowance Yes Yes No
Maternity Allowance Yes Yes No
Bereavement Payment Yes Yes Yes
Bereavement Allowance Yes Yes Yes
Widowed Parent’s Allowance Yes Yes Yes
Bereavement Support Payment Yes Yes No


Self-employed people with an income of less than £6,025 can voluntarily pay Class 2 NI contributions to maintain their eligibility for the benefits listed in the table above.

The new system

From April 2018, Class 2 NI will be abolished and there will be changes to Class 4 NI:

People earning above £8,164 will pay Class 4 contributions at a rate of 10% (currently 9%). This will rise to 11% in 2019. Class 4 will replace Class 2 for determining any entitlement to benefits. Those that earn below the small profits threshold (currently £6,025) won’t be able to pay Class 2 NI contributions voluntarily as they can now but will be able to pay Class 3 which is at a higher rate. Class 2 is currently set at £2.85 a week, whereas Class 3 is £14.25 a week. Class 3 NI benefits will be expanded to include maternity allowance and contributory employment and support allowance.

If you’d like some individual advice on how these changes could impact you, please call me on 01604 330220 or send me an email.