From April 2018, class 2 national insurance contributions (NICs) will be abolished.
Class 2 NICs are a flat-rate charge of £2.85 a week and are paid by self-employed individuals generating net profits above the small profits threshold – currently £6,025.
Individuals earning below this threshold may still make contributions, but these are done on a voluntary basis as this allows sole traders to remain eligible for benefits such as the state pension.
However, as of 6 April 2018, class 4 will become the only national insurance class paid by the self-employed.
What will the new system look like and how will the abolition of class 2 affect self-employed individuals?
The new class 4 NICs
From the 2018/19 tax year, all self-employed individuals will pay class 4 NICs.
The current lower profits limit, at which class 4 NICs become payable (£8,164), will remain and the class 2 small profits threshold and lower profits limit will be carried over to form a new class 4 zero-rate band. This is effectively an integration of class 2 into class 4, minus the £2.85 weekly charge.
Currently, payment of class 4 NICs does not contribute towards entitlement to state benefits. This will change from April 2018.
All sole traders with earnings exceeding the small profits threshold (including those within the zero-rate band) will accrue qualifying years for certain benefits, such as the state pension.
Annual profits exceeding £6,025 will therefore equate to 1 qualifying year of benefit entitlement.
How will this affect me?
Whether or not you will be paying less national insurance will depend on your annual earnings.
Those with earnings under the small profits threshold (and therefore exempt from class 2 NICs) will not experience any changes. However, individuals currently paying the class 2 weekly £2.85 rate no longer have to do so from April 2018.
The new system will be especially beneficial for those with earnings between the small profits threshold and the lower earnings limit, who will enjoy the zero-rate band on NICs while still accruing qualifying years for access to state benefits.
Individuals earning below the small profits threshold are likely to see significant increases to their voluntary contributions if they want to remain eligible for state benefits.
With the abolition of the class 2 voluntary payment, class 3 will become the only way to make voluntary contributions.
Class 3 NICs currently stand at £14.25 a week, far higher than the £2.85 class 2 rate.
Do you have any questions about the upcoming changes to your NICs? Our accountants and business advisers are here to assist you every step of the way.
Contact us on 01628 631 056 or email email@example.com for more information about our services for sole traders.