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|
|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.