An update on national insurance contributions
In an unexpected move, the government recently announced that it will not be abolishing Class 2 national insurance contributions (NICs) during this Parliament. With this in mind, we provide an overview of the current NICs regime.
What are NICs?
NICs are a tax on earned income. Under the regime, income is divided into various classes, including Class 1 contributions, which are payable on earnings from employment, and Class 2 and 4 contributions, which apply to the profits of self-employed individuals.
Who must pay NICs?
Under the NICs regime, employees are required to pay Class 1 NICs on their earnings. Employers must pay a secondary contribution.
In 2018/19, employees need only pay NICs when their earnings exceed the £162 per week 'primary threshold'. The amount payable is 12% of the earnings above this threshold, up to the Upper Earnings Limit (UEL) of £892 per week. An additional 2% charge applies for weekly earnings above the UEL.
Employers are required to pay secondary contributions of 13.8% of earnings above the £162 per week 'secondary threshold'. No upper limit exists for employer contributions.
For employees aged under 21, employer NICs are reduced from 13.8% to 0%: however, the worker must be aged under 21 when the earnings are paid for this rate to apply. Similarly, employer NICs are reduced to 0% for apprentices aged under 25 who earn less than the Upper Secondary Threshold (UST) of £892 per week (2018/19).
NICs and the self-employed
Depending on their profits, self-employed individuals are required to pay Class 2 and Class 4 NICs. However, special rules apply to those in specific jobs (such as invigilators, ministers of religion who do not receive a stipend and people who run land or property businesses).
The self-employed pay a flat rate Class 2 contribution, alongside a variable amount based on the business's taxable profits (Class 4). Class 2 NICs are usually collected as part of the final self assessment payment. Those with profits below the £6,205 Small Profits Threshold are not required to pay Class 2 NICs, but can do so voluntarily.
In 2018/19, Class 4 NICs are payable at 9% on profits between £8,424 and £46,350, with an additional 2% added on profits above this amount.
Abolition of Class 2 NICs
In September 2018, the government announced that the planned abolition of Class 2 NICs will now not take place during this Parliament. Former Chancellor George Osborne originally announced the tax cut during the 2016 Budget, and stated that abolishing Class 2 NICs would benefit an estimated 3.4 million self-employed workers.
Class 2 NICs were due to be abolished in April 2018, but in November 2017 the plans were put on hold until 6 April 2019.
Announcing its latest decision to scrap the plans entirely, the government cited the potential 'negative impacts' the abolition of Class 2 NICs could have on low-earners. It plans to keep the matter 'under review' in the context of the wider tax system.
Some individuals may choose to pay Class 3 NICs at a rate of £14.65 per week (2018/19). These provide individuals with an entitlement to the State Pension, Bereavement Benefit, Maternity Allowance and contributory Employment and Support Allowance for self-employed workers.
As your accountants, we can help you in ensuring your business is compliant with the NIC regulations. Please contact us for more information.