The Treasury has postponed the scrapping of 'class 2' national insurance contributions for a year until April 2019 meaning many self-employed workers will have to pay almost £150 more than expected over the extra 12 months.
However, if you're self-employed, earn under £6,025/year and choose to pay national insurance to be eligible for a state pension, the delay could save you close to £600.
Who pays class 2 national insurance contributions?
You currently pay class 2 national insurance contributions (NICs) of £2.85 a week if you're self-employed and earn more than £6,025/yr. This qualifies you for the basic state pension and benefits such as maternity allowance and contribution-based employment and support allowance.
If you earn less than £6,025/yr, you don't have to pay national insurance. But you can choose to pay class 2 NICs to make yourself eligible for the same set of benefits.
How will the abolition of class 2 NICs affect me?
The abolition of class 2 NICs was first announced in the 2015 Summer Budget. The Government said the decision followed recommendations from the Office of Tax Simplification, and would help make the tax system more straightforward.
The Treasury had planned to axe class 2 NICs in April 2018, but now says it will do so in April 2019 instead.
The effect of the abolition and the delay announced this week depends on your income bracket:
- If you're self-employed and earn more than £6,025/yr... you won't have to pay class 2 NICs any more but will still be treated as if you paid them for the purpose of gaining access to contributory benefits. So you'll still qualify for the state pension and other benefits but will save £148.20/yr.
- If you're self-employed and earn less than £6,025/yr... you'll no longer be able to voluntarily pay class 2 NICs to qualify for the state pension and other benefits. To continue to qualify you'll need to pay class 3 NICs instead, which will cost £741/yr instead of £148.20/yr so you'll pay an extra £592.80/yr, though you'd save this figure during the 12-month postponement.
So the year's delay just announced is bad news for self-employed people earning more than £6,025/yr you'll have to keep paying class 2 NICs for another year instead of getting the benefits without paying anything.
But it's good news for the small number of self-employed people who earn less than £6,025/yr and choose to pay national insurance, because they'll be able to pay much cheaper class 2 NICs for another year. The Treasury says this amounts to 2% of NIC-paying self-employed people.
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What does the Treasury say?
Andrew Jones MP, the Exchequer Secretary to the Treasury, said the abolition of class 2 NICs had been delayed for a year "to ensure that there are no unintended consequences for the lowest paid".
We've asked the Treasury if that means there could be further changes on the horizon for those who earn less than £6,025/yr but it's said that at the moment, it cannot say.