At the moment, the self employed pay Class 2 and Class 4 National Insurance Contributions (NICs). Class 2 NICs are paid at a flat rate of £ 2.85 per week on profits exceeding £ 6,025 and individuals have the option of paying Class 2 NICs on a voluntary basis if their profits are below this limit. Class 4 NICs are calculated as a percentage of profits, 9% on profits between £ 8,164 and £ 45,000 and 2% on profits above £ 45,000.
From April 2018 Class 2 NICs will be abolished and Class 4 NICs will be restructured to give the self employed access to contributory benefits. These changes will see the introduction of three profit limits and the rate of Class 4 NICs will be dependent on the level of profits. The exact thresholds will be announced with the 2018/19 rates and allowances but the implications of these new rules are set out below.
If you have profits under the Small Profits Limit you will not be required to pay Class 4 NICs but this will mean that you will not have a qualifying year. In order to attain a qualifying year and secure access to contributory benefits including the State Pension and the contributory Employment and Support Allowance the individual will need to pay Class 3 NICs. The current rate in 2017/18 for Class 3 NICs is £ 741 per year. At present, an individual in this position would only need to pay Class 2 NICs of £ 148.20 to obtain a similar level of access. These changes will mean that a self employed person with very low profits will have to pay roughly £ 600 more each year.
Those with profits between the Small Profits Limit and Lower Profits Limit will not be liable to pay Class 4 NICs but they will still have a qualifying year. An individual in this category will have most to gain from the changes as they would have previously been required to pay £ 148.20 for the same level of contributory benefits.
Profits between the Lower Profits Limit and the Upper Profits Limit will be subject to Class 4 NIC at a rate of 9% and above the Upper Profits Limit the rate will be 2%. Profits which fall into these two categories will result in qualifying years.
With these changes on the horizon it is worth obtaining a state pension forecast to check your National Insurance Record and to take advice so you are aware of the options available to you. If you would like to discuss the above or any other tax matter please contact Kirsty MacDonald at Rennie Welch on 01573 224391 or by email at firstname.lastname@example.org.
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