The government has decided not to scrap Class 2 National Insurance Contributions for self-employed people. What does this u-turn mean for your business?
It’s a controversial move that has divided opinion in both the small business and political worlds. So has the government done the right thing in backtracking on its plan?
Reversing the decision to drop Class 2 Contributions will leave 2.7 million self-employed workers £150 a year worse off, reports the BBC. But on the flipside, it could save those earning below the £6,205 profit threshold from a substantial tax hike.
It depends on your profits. If you earn more than £6,205 a year, the government's 180 will leave you slightly worse off, but if your profits are less than £6,205, you'll be far better off than if the plan to simply scrap Class 2 Contributions had gone ahead.
Self-employed workers who make an annual profit of more than £6,205 will have to keep paying their Class 2 National Insurance. At current rates of £2.95 a week, that adds up to £153.40 a year.
Class 4 Contributions will also stay the same. Those making a profit of over £8,424 need to pay nine per cent on profits up to £46,350, and two per cent on any profits over that amount.
If you make an annual profit of less than £6,205, you don’t have to pay Class 2 National Insurance. However, you may have been paying it voluntarily to make sure you get access to the State Pension when you retire.
Had the government stuck with its plan to get rid of Class 2 Contributions, you’d have been moved to Class 3. Whereas weekly payments for Class 2 are £2.95, weekly payments for Class 3 are £14.65 for tax year 2018-19. So the change would’ve meant you having to pay around five times more National Insurance.
The government held a consultation on how to get around this unintentional burden on the lowest-earning self-employed workers. But ultimately they decided that the possible solutions would only make the tax system more complicated, going against the plan's purpose – to make tax simpler.
Media and entertainment union BECTU is one organisation that has welcomed the government’s u-turn. National Secretary of BECTU, Spencer Macdonald said, "Scrapping Class 2 NIC would have seen the bill for low-paid freelancers who want to qualify for the state pension shoot up to £761.80 a year, from £153.40 at present.
"It could also have affected anyone who goes through a spell of low earnings and loses their annual NIC credit, so many of our members will be spared worry about their state pension rights."
However, the Federation of Small Businesses has had its say, and believes the Treasury should’ve worked harder to find a way to protect the lowest earners while still giving the tax break to the rest of the self-employed.
By keeping the Class 2 Contributions rules for the self-employed as they are, the Treasury will gain more than £350 million a year over the next three years, reports the BBC. So how will it spend the money it's saving?
The Chancellor hasn't made any annoucements as yet, but we could well find out in the Autumn Budget – along with what else he has in store for small businesses.
How do you think the government should spend the money it's saving by keeping Class 2 National Insurance Contributions for the self-employed in place? Let us know in the comments below.
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22 June 2020 • 9-minute read
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