Class 2 National Insurance – watch what you pay.
Class 2 National Insurance is changing. Self-employed people pay class 2 National Insurance, usually by monthly direct debit. Where profits are low it has been possible to apply for an exception certificate, so you don’t need to pay.
From 6 April 2015, all this changes. Key points are:
- You no longer need to apply for an exception from paying class 2 National Insurance due to low self-employed profits. If your profits are below the Small Profit Threshold (£5,965 for 2015-16), you simply won’t be asked to pay
- Any class 2 National Insurance that is due will be calculated when you send in your 2015-16 tax return. It will be added to your self-assessment tax bill
- If you pay class 2 National Insurance, but are not in self assessment (e.g you work full-time abroad), HMRC should contact you to make arrangements for continuing to pay class 2
Making the changeover
As with all new systems, there are new things to watch out for. People who already pay class 2 by direct debit, may not be aware of this fact, but they are actually paying four months in arrears. This means that direct debits will continue for four months into the new tax year – until 10 July 2015 – in order to pay the 2014-15 contributions.
From August 2015, there will be no automatic deductions by direct debit. The full year’s contributions will be due for payment by 31 January 2017, along with any income tax and class 4 National Insurance.
There are two issues you may wish to consider:
Paying by instalments
If you prefer to continue paying class 2 National Insurance by instalments, you will need to set up a Budget Payment Plan.
Making voluntary payments
Class 2 National Insurance gives you entitlement to contributions-based benefits such as Maternity Allowance, Employment and Support Allowance (ESA) and State Retirement Pension.
If you are not eligible for National Insurance Credits, you may want to pay class 2 National Insurance voluntarily in order to maintain your contributions record (see eligibility criteria on the Gov.uk website).
You will normally pay voluntary class 2 contributions via self assessment, but some people may need to make voluntary contributions in advance. This can apply if you need to claim Maternity Allowance or ESA.
The reason for paying in advance is because you need to pay the National Insurance contributions before you claim the benefit. If you wait until the usual self-assessment filing deadline this could be too late. This can apply even if you are over the Small Profit Threshold.
Jane is self-employed in the tax year 2015-16. Her profits are over the Small Profit Threshold. She is due to be on maternity leave from November 2015. On the normal timescale, Jane would normally pay class 2 National Insurance by 31 January 2017. This would be too late to affect her Maternity Allowance entitlement. To avoid this situation, she may choose to voluntarily pay class 2 National Insurance in advance for 2015-16.
Impact of changing state pension age
Once you reach state pension age, National Insurance is no longer payable, (though for the self-employed, class 4 National Insurance may be due for the tax year in which you reach state pension age, but not the following year). These changes apply to:
- employees (but not employers), and
- the self-employed
It is important that you check that you are not paying National Insurance after you state pension date. This applies even if you do not draw your state pension at once. You can check your state pension date at:
- Pension age calculator – https://www.gov.uk/calculate-state-pension
- State pension timetable – https://www.gov.uk/government/publications/state-pension-age-timetable
Most people will not need to do anything about the changes. But if you think you might need to claim contributions-based benefits, you may need to consider making voluntary contributions in advance.