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Gov't U-turn on Class 2 NI contribution abolishment has positives but system needs a review

The Government’s decision to go back on its proposal to abolish Class 2 national insurance contributions for the self-employed, while prompting calls for a review of the national insurance system, has also saved the self employed over £600 per annum.

The Government said it had abandoned the reform due to the negative impacts it could have on some of the lowest earners and the fact that any options identified to mitigate this would, in their view, introduce greater complexity to the tax system when the initial objective of the policy was to simplify the system.

The self-employed pay two types of NI contributions, depending on their profits: Class 2 contributions of £2.95 per week if annual profits exceed £6,205 and Class 4 NI of 9% on profits above £8,424. When profits exceed £46,350, Class 4 NI contributions fall to 2% on the excess profits. The self-employed can pay Class 2 contributions voluntarily even if they earn less than the threshold as it gives them rights to various state benefits, such as the state pension.

The government had planned to abolish Class 2 N, with effect from April 2019 and instead change the rate and threshold for paying Class 4 NI. Those Class 4 contributions paid or credited would then count towards state benefits. But under the proposals, Class 4 contributions could not be paid voluntarily and the lowest earning self-employed person would instead have had to pay Class 3 NI contributions at the rate of £14.65 per week (compared to Class 2 at £2.95 a week) if they wanted to maintain rights to certain state benefits including the state pension

Anne Fairpo, Chair of the Low Incomes Tax Reform Group (LITRG), said: “National insurance is a hugely complex area. What at first must have appeared a straightforward change, the government ran into unintended consequences and have now decided to abandon it entirely. Since the government announced its intention to abolish Class 2 NIC and amend Class 4 NIC, LITRG has been raising concerns about the lowest earners. Those with profits below the small profits threshold (currently £6,205) who want to build up an entitlement to contributory benefits such as the state retirement pension would have had to pay Class 3 contributions under the proposals, which are five times as much as current Class 2 contributions.

“Although we had concerns about the original proposals, we fully recognised that they would benefit some people and that is why we put forward a number of practical suggestions that could have addressed the negative impact on the lowest earners – for example by introducing a new lower rate of Class 3 for the self-employed. Whilst we agree that making the tax system more complex is not desirable, we do think the benefits gained may have outweighed any additional complexity.

“Although this announcement now means that Class 2 will remain, at least for the remainder of this Parliament, the Government has stated it will keep this issue under review. This is welcome. Public understanding of NI is low - we receive many queries about it and we do need to keep looking for ways to make it much simpler to manage.

“There are also wider changes that NI needs to adapt to. Given the significant changes in people’s working patterns including the increase in zero-hour contracts, holding more than one employment at a time or being employed and self-employed at the same time, we would like to see the whole system of national insurance reconsidered rather than tinkering and piecemeal changes. This is especially important given the ever-increasing numbers of self-employed workers.”

George Bull, Senior Tax Partner at RSM UK says: “As Parliament had neither the time nor, apparently, the inclination to address these complexities – especially as NIC is in urgent need of wider reform not least because many of its curious features underpin the gig economy – the decision not to scrap Class 2 NIC should be a cause for rejoicing by the self-employed who would otherwise have had to pay an extra £608 a year under Class 3 for fewer benefits than they enjoy under Class 2.”

 

 

 

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