Class 2 National Insurance Contributions

tax advisors in irlam

Class 2 NICs were due to be abolished in April 2018, however the Government has now delayed this and will instead introduce the NICs Bill will now be introduced in 2018, with the abolition coming into effect in 2019. The delay will reportedly save the government around £200 million.

What is the background to this decision?

As outlined on the Government website, the 2015 Summer Budget confirmed the government’s intention to abolish Class 2 National Insurance contributions (NICs). This means that instead of paying two classes of NICs (Class 2 and Class 4), the self-employed will pay just one (Class 4) in the future. This follows the recommendations of the Office of Tax Simplification and will simplify the NICs system for millions of people.

What are NICs in the first place?

National Insurance contributions (or NICs) are a charge made on your earnings and are paid by all employees, employers and the self-employed. NICs are used to fund the State Pension and other contributory benefits via the National Insurance Fund, as well as the National Health Service. So in essence they are a form of taxation for those who work as well as the companies that employ them.

With so many self-employed people in the workforce, just short of 5 million, their NICs are an important part of the Government’s tax revenue.

What’s the difference between class 2 and 4?

Class 2 NICs are paid at a flat rate for each week or part week worked by someone in a tax year, if their profits exceed the small profits threshold. The current rate is £2.80 and the small profits threshold is £5965.

Class 4 NICs are paid on net profits that are liable to income tax. That is 9% on profits between the Lower and Upper profits limits. These are currently £8060 (LPL) and £43,000 (UPL). Above the UPL the rate falls to 2%.

In essence the abolition is a simplification but it also requires reform of class 4 contributions to enable a contributory test on profits to be introduced. Above a certain level of profits these contributions could then count towards qualifying years for the State Pension and other benefits.

Why the delay in abolition?

As you can already see this is a highly complex piece of legislation and needs careful planning. The government has therefore delayed implementation for another year and for the next tax year contributions will remain as they are with the exception of any changes to the limits and rates charged which can always be changed in a forthcoming budget.

If you are self-employed and need assistance with your NICs and other deductions and payments required by HMRC, then please give MCC Accountants a call, this is an area we specialise in and help many self-employed workers with.




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