Some 3.4 million self-employed workers may be paying more tax next year than they anticipated, after the Treasury reversed plans to scrap Class 2 National Insurance contributions.
The cancellation will cost those who work for themselves £2.95 per week, or £153 per year, compared with if the change had gone ahead as planned in April 2019 – though people with low incomes may be better off.
Which? explains how the change will affect your bottom line if you’re self-employed.
What are Class 2 National Insurance contributions?
Class 2 National Insurance contributions are paid by people who are self-employed on any profits above £6,205. For 2018-19, you pay £2.95 per week, or £153.40 for the year. In addition, self-employed people pay Class 4 contributions, which are calculated as a percentage of earnings.
Then-Chancellor George Osborne announced in 2015 that Class 2 contributions would be abolished, and self-employed workers would instead qualify for state benefits through Class 4 contributions only.
The changes, which were originally slated for April 2018, were delayed until 2019, before last week’s decision to scrap the plan altogether.
As such, self-employed workers will continue to pay both Class 2 and Class 4 contributions in the coming years.
- Find out more: How much National Insurance do I pay?
Who is better off with Class 2 contributions?
Some low-earning self-employed people stand to benefit from the continuation of Class 2 contributions. Currently, self-employed people who earn less than £6,205 can opt to make voluntary Class 2 contributions to ensure they’ll still able to access the state pension in future.
If Class 2 had been scrapped, these workers would have been forced to make the more expensive class 3 voluntary contributions instead. For the current tax year, these cost £14.65 per week, leaving low-earners around £600 worse off.
Treasury minister Robert Jenrick said: ‘A significant number of self-employed individuals on the lowest profits would have seen the voluntary payment they make to maintain access to the State Pension rise substantially.
‘Having listened to those likely to be affected by this change we have concluded that it would not be right to proceed during this Parliament, given the negative impacts it could have on some of the lowest earning in our society.’
But those earning above the Class 2 threshold will pay £153 a year more in National Insurance than they would have if the plans had gone ahead.
- Find out more: self-employed National Insurance
Do self-employed people get a fair deal?
Currently, employees pay 12% of annual earnings between £8,424 and £46,384 in National Insurance, falling to 2% on higher amounts. Their employers are charged a further 13.8% on earnings above £8,424.
Self-employed workers pay Class 4 contributions, worth 9% on earnings between £8,424 and £46,350, and 2% on higher amounts, with no equivalent employers’ contributions.
The difference means an employee earning £40,000 would pay £12,146 per year in tax and National Insurance, including the employer’s contribution, while a self-employed worker would pay £8,713, including both Class 2 and Class 4 NI contributions and income tax, according to figures for the Institute for Fiscal Studies.
Historically, self-employed workers paid a lower rate as they didn’t qualify for the state pension, though they now do. But employees do still receive some benefits from national insurance that the self-employed don’t, such as statutory sick pay – though this is arguably paid for by the 13.8% employer contribution.
In 2016, Philip Hammond announced plans to increase Class 4 self-employed contributions to 11%, to close the gap between employees and the self-employed. However, following a backlash from his party, the changes were promptly cancelled.
Whether you’re self-employed or work for an employer, you can use our National Insurance calculator to figure out your bill.
How do the self-employed pay National Insurance?
If you’re self-employed, you pay tax and National Insurance via a self-assessment tax return.
This is due by 31 January after the end of the tax year if you’re filing online, or 31 October if you’re using a paper form.
You’ll need to pay the previous year’s outstanding balance on 31 January and, if you’re on ‘payment on account’, half of the next year’s estimated payment in advance.
- Need help filing your tax return? You can use the Which? Tax Calculator to tot up your bill and send your return direct to HMRC.