Whether or not Class 2 National Insurance Contributions (NICs) can be paid depends on whether an individual falls within the definition of a ‘self-employed earner’ for NIC purposes, and if so, whether profits are in excess of the existing small profits threshold (£6,025 for 2017/18).
The definition of a self-employed earner is defined as someone ‘who is gainfully employed in Great Britain otherwise than in employed earner’s employment (whether or not he is also employed in such employment)’ (SSCBA 1992, s 2(1)(b)). A person who is regarded as self-employed for income tax purposes, and who is taxed on the profits from their trade, profession or vocation, is generally, but not always, regarded as a self-employed earner for NIC, which means they will be required to pay Class 2 and Class 4 NICs where applicable. By contrast, a person who receives investment income is not liable to pay NICs on that income.
Being liable to pay Class 2 NICs can be quite advantageous as contributions give access to certain contributory-based benefits for a relatively low outlay – £2.85 per week for 2017/18. For example, where NICs are not otherwise payable, it may advantageous for a landlord to consider turning ‘investment’ letting into a business to bring it within the scope of Class 2 NICs, which in turn will enable him to build up an entitlement to state pension.
Self-employed people currently be required (subject to certain conditions) to pay both Class 2 and Class 4 NICs. Class 4 NICs are, broadly, calculated by reference to the payee’s profits. For 2017/18 they are payable at the rate of 9% on profits between £8,164 (the Lower Profits Limit (LPL)) and £45,000 (the Upper Profits Limit (UPL)), and at 2% above £45,000.
From April 2018, however, Class 2 contributions will be abolished and the Class 4 contributions system will be reformed to include a new threshold (the Small Profits Limit (SPL)). Although we do not yet know what the individual thresholds will be, we do know that people with profits between the SPL and LPL will not be liable to pay Class 4 contributions, but will be treated as if they have paid Class 4 contributions for the purposes of gaining access to contributory benefits. All those with profits at or above the Class 4 SPL will gain access to the new state pension, contributory Employment and Support Allowance (ESA) and Bereavement Benefit. Those with profits above the LPL will continue to pay Class 4 contributions.
The abolition of Class 2 will have adverse consequences for those with profits below the current small profits threshold, who are not obliged to pay Class 2 but are doing so voluntarily in order to build up their contributions record. If they wish to continue to secure contributory benefits by paying NICs after April 2018, they will instead have to pay voluntary Class 3 contributions, currently payable at the rate of £14.25 per week – five times the Class 2 contribution rate, and a difference of £592.80 based on 2017/18 rates.
Self-employed individuals should be encouraged to check their NIC record for the last few years – this can be done online through the Gov.uk website. Those wishing to protect their state pension entitlement should ensure that they have paid, and continue to pay, as many Class 2 contributions as they need to before abolition in April 2018. A total of 35 years of contributions paid or credited are currently needed to secure entitlement to the full state pension. The minimum needed to secure any state pension is 10 years.