NATIONAL INSURANCE - 23.02.2018

Self-employed NI in 2018/19 - what will your clients pay?

Class 2

Unlike employed earners, self-employed clients currently pay two classes of NI contribution - Class 2 and Class 4.

Class 2 contributions are payable by self-employed earners whose earnings from self-employment exceed the small profits threshold - set at £6,025 for 2017/18 - for each week of self-employment in the tax year. This includes weeks where the client is on holiday or otherwise not working if the self-employment is ongoing.

For 2017/18, the rate of Class 2 NI is £2.85 per week. Contributions are now payable via the self-assessment system, and must be paid no later than 31 January following the tax year to which they relate - so those for 2017/18 are due for payment by 31 January 2019. The whole year’s liability is paid in one instalment. Class 2 contributions are not taken into account when working out any payments on account.

Class 4

Self-employed clients also pay Class 4 contributions if their profits from self-employment exceed the lower profits limit - set at £8,164 for 2017/18. Contributions are payable at the main rate of 9% on earnings between the lower profits limit and the upper profits limit (set at £45,000 for 2017/18), and at the additional Class 4 rate of 2% on profits in excess of the upper profits limit.

Unlike Class 2, Class 4 contributions do not currently confer any benefit entitlement and operate like an additional tax on profits. They too are collected via the self-assessment system, but like income tax are taken into account when working out payments on account.

Where a client is simultaneously employed and self-employed, they will pay Class 2 and Class 4 contributions by reference to the profits from the self-employment and Class 1 contributions on earnings from the employment. However, an annual maximum sets a cap on the total contributions payable for any one tax year.

Pro advice. We covered this, along with how to claim a refund of an overpayment in yr.3, iss.5, pg.4 (see Follow up ).

Proposed reforms

The NI regime for self-employed clients was due to be reformed with effect from 6 April 2018. Draft legislation was to have been introduced into Parliament in 2017, but in November 2017 it was announced that it had been delayed until 2018. As a result, the reforms will now not come into force until April 2019, taking effect from the 2019/20 tax year onward.

Under the reforms, Class 2 NI is to be abolished. This will now take effect from 6 April 2019. Class 4 contributions are to be reformed from the same date, so as to provide the mechanism by which self-employed clients can maintain their contributions record and earn entitlement to the state pension and certain contributory benefits.

The reformed Class 4 will look similar to the way that it operates now, but with the addition of a new small profits limit. This is to be set at 52 times the lower earnings limit applying for Class 1 NI purposes. Consequently, based on 2017/18 figures, the new small profits limit would be equivalent to £5,876.

Notional rate

Mirroring the Class 1 approach, under the new system self-employed clients will pay contributions at a notional zero rate on earnings between the new small profits limit and the lower profits limit. These notional zero-rate contributions will count towards their contributions record, enabling self-employed earners whose profits fall within this band to build up their contributions record for no cost. This will bring the treatment of self-employed clients into line with that for employed clients, who pay Class 1 contributions at a zero rate on the same earnings band.

Pro advice. In the case of employed earners, this occurs between the lower earnings limit and the primary threshold (which aligns with the lower profits limit for Class 4 purposes).

Under the new-look Class 4, self-employed clients will continue to pay Class 4 contributions at the main Class 4 rate on profits between the lower profits limit and the upper profits limit, and at the additional rate on profits above the upper profits limit.

What isn’t known at the moment is exactly what the main rate will be. The government had planned to increase it to 10% and then 11% from April 2018 and 2019 respectively. However, a wave of public and professional criticism of the so-called “white van man tax” ensured a swift U-turn and (for now at least) the rate remains the same.

In its reformed state, Class 4 contributions will mirror Class 1 contributions when applied on an annual earnings period basis (as for company directors) - albeit (initially anyway) with different rates.

New rates for 2018/19

Because of the delay, the current system will continue for 2018/19. The rates and thresholds will change as follows:

Winners

The delay means that your self-employed clients with profits below the small profits threshold will be able to accumulate a final “cheap” year by paying £153.40 (52 x £2.95) on a voluntary basis. This is far more cost effective than the rate of voluntary Class 3 contributions which would cost them £761.80.

From 2019/20, those clients whose earnings fall below the new small profits threshold for Class 4 purposes will lose the opportunity to pay Class 2 voluntarily and will not benefit from the new Class 4 zero rate either. To build up a contribution year, they will have to pay Class 3 contributions, which are considerably more expensive than Class 2. When announcing the delay to the reforms, the government acknowledged their impact on those with low earnings and gave an undertaking to give further consideration to their plight.

Pro advice. Encourage clients with small self-employed profits to pay the Class 2 voluntarily for 2018/19 if they do not pay Class 1, or they will lose the contribution year.

Losers

Some clients will lose out because of the delay. If the changes had gone ahead on time, clients with profits falling between the new small profits threshold and the lower profits threshold - likely to have been those falling between £6,032 and £8,424 based on the 2018/19 rates - would have accumulated a qualifying contribution year for no cost. Now, they will be stuck paying the £153.40 Class 2 amount.

Further information on the proposed Class 4 system as it will apply from April 2019 is available from HMRC (see Follow up ).

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