Rishi Sunak has just announced in his spring statement that there will be an increase to the National Insurance threshold with effect from July so that people will now only pay NI on earnings over £12,570. This brings the NI threshold into line with the level at which people start to pay tax.
He has also announced that from 2024 the lower rate of income tax, which now stands at 20%, will be decreased by 1 pence in the pound to 19p.
More to follow on this.
Although not technically a tax allowance, we thought it was worth covering what the rate of National Insurance contributions are for self-employed people for the tax year 2019/20.
Self-employed NI rates have been a bit confusing in the past few years as changes were proposed to scrap Class 2 NI and subject people only to Class 4 NI – however, these changes have been scrapped (for the present) so the two tier approach still applies.
If you are self-employed then the rate of National Insurance that you pay depends on your profits for the tax year. There are effectively 4 different tranches that trigger different rates of NI.
If your profits are less than £6,365 then you do not need to pay any National Insurance contributions. However, you may think it worthwhile to pay voluntary Class 2 contributions if you are not already covered for these in any other capacity as this may increase or entitle you to certain benefits including additional state pension or Maternity Allowance.
If your profits are between £6,365 and £8,632 then you only have to pay Class 2 NI contributions which are at a flat rate and not based on the amount of profits. Most people pay these through the self-assessment tax return.
For 2019/20 Class 2 NI contributions are £3 a week – so £156 for the year.
If your profits are £8,632 or above then you will also need to pay Class 4 NI as well as Class 2 NI payments. Class 4 NI is charged at 9% of profits between £8,632 and £50,000.
If your profits from your self-employed business are over £50,000 then you will need to pay Class 2 NI of £3 a week, plus Class 4 NI for the earnings between £8,632 and £50,000, plus 2% on earnings over £50,000.
In 2016 the government announced a change to the calculation of self-employed NI contributions. This change meant that Class 2 NI contributions were going to be scrapped and other arrangements were put into effect, particularly for lower earning self-employed people.
You can find further details of the proposed change here.
The change to Class 2 NI was subsequently postponed and was going to be introduced in the tax year 2018/19.
However, it has now been announced that the scrapping of these NI contributions has been cancelled and the current arrangements will remain in place for the foreseeable future.
The current rates for Self Employed National Insurance contributions are as follows:
| Class | Rate for tax year 2018 to 2019 |
|---|---|
| Class 2 | £2.95 a week |
| Class 4 | 9% on profits between £8,424 and £46,350 2% on profits over £46,350 |
Class 2 National Insurance Contributions are paid by self-employed people whose profits are above the Small Profits Threshold which for 2017/18 is £6,025.
If you earn below that level you are eligible for the small earnings exception (although this was abolished in 2015) which means that you do not have to pay NI but can pay voluntary Class 2 if you wish to.
If you earn above £8,164 then you pay Class 4 NI as well on your profits.
The payment of Class 2 contributions (which are currently set at £2.85 a week) enables those people who pay them access to contributory benefits (class 4 does not).
However, the 2016 Autumn Statement confirmed that Class 2 NICs will be abolished with effect from 2018/19** and the self-employed will then have to pay Class 4 (or voluntary Class 3) NICs. Class 4 NICs will then qualify for contributory benefits.
The rules around this are quite complex and there will apparently be some transitional help. But in essence, Class 4 contributions will need to be paid by the self-employed on earnings over the Lower Profits Limit.
For 2017/18 the Lower Profits Limit was £8,164 and any profit between that and £45,000 was charged at 9%. Profits over £45,000 are subject to a charge of 2% for Class 4 NICs.
Once the Class 2 NICs are abolished a new threshold will be introduced called the Small Profits Limit. This will be equivalent to 52 x the Lower Earnings Limit. For 2017/18 this is £6,025.
Anyone whose profits fall between the Small Profits Limit and the Lower Profits limit will not need to pay the Class 4 NI contributions but will be treated as if they have paid them.
As Class 4 NICs will in future give access to contributory benefits, this in turn includes qualifying years for the State Pension.
If your earnings are below £6,025 (or the rate declared for 2018/19) then you will not need to pay NICs but can choose to pay the voluntary Class 3 NICs which are £14.80 a week.
If your earnings are between £6,025 and £8,164 (or equivalent 2018/19 levels) you do not have to pay NI but will be credited with paying Class 4 NICs.
If your earnings are above £8,164 (or 2018/19 equivalent) you will pay only Class 4 NICs at the effective rate.
The abolition of class 2 NICs has been postponed until 2019/20.