In April 2015 a revised system for the calculation and collection of Class 2 NIC was introduced. The default position is that the collection of Class 2 NIC is dealt with through the annual Self Assessment process and payable at the same time as any income tax or Class 4 NIC payable for the tax year. Technically it will be possible to re-apply to make payments by direct debit and further information is available here.
The old system – 2014/15
Technically liability for Class 2 arises in respect of each week that an individual has ‘earnings from a self-employed employment’. Earnings are similar to trading profits but are not always the same.
Class 2 NIC have been payable twice a year, with an option to pay the liability by direct debit.
If paid twice a year the due dates are the same as for the payment of income tax and Class 4 contributions for profits assessable in 2014/15:
First payment due 31 January 2015
Second payment due 31 July 2015
Alternatively it is possible to pay by monthly or six monthly direct debit with HMRC advising individuals of the precise dates by which payments are taken from bank accounts.
The new system – 2015/16 and onwards
From April 2015 Class 2 NIC changed from being a weekly liability to an annual liability which is triggered by the amount of profits which are declared to HMRC through the self assessment system. The amount of Class 2 NIC is still calculated based on the number of weeks of self-employment in the year. This makes the system easier as the Class 2 NIC is one simple calculation based on the same figure of profits being used for income tax.
For example, a 2016/17 tax return is submitted by an individual in October 2017 showing trading profits of £30,000. The Class 2 liability is therefore £2.80 for each week the individual was self-employed in 2016/17.
The Class 2 liability will be due no later than 31 January 2018 and will be shown as part of the self assessment statement which details the income tax and Class 4 liabilities due on 31 January 2018. The Class 2 liability will not however be included in the calculation of payments on account of income tax and Class 4 for 2017/18.
Special circumstances – low profits
Under the old system, individuals expected to have a low amount of earnings for the tax year could apply for a Small Earnings Exception certificate. This is no longer necessary under the new system. If the assessable trading profits submitted to HMRC are below the Small Profits Threshold (£6,025 for 2017/18), no Class 2 NIC is due. An individual can however pay voluntary Class 2 NIC in order to maintain a contribution record for contributory benefits (for example the State Pension).
This is an important change as under the old system a taxpayer had to take action to opt out of paying Class 2 NIC if their earnings were low enough so in most cases the default position was that Class 2 NIC was paid and the year counts as a year in which NIC was paid. Under the new system taxpayers have to opt in to paying Class 2 NIC if their earnings are too low to pay them in the normal course. This means of course that the default position for low earners is that they will on the face of it have no contribution history for a tax year in which their earnings are too low for there to be an obligation to pay Class 2 NIC. Given Class 2 NIC is only £2.85 per week the choice to pay or not to pay can have a big impact on benefit entitlement, particularly state pension which will soon require 35 qualifying years (i.e. years in which NICs were paid) in order to get a full state pension.
A year’s worth of Class 2 NIC will cost £148.20 in 2017/18 so in some cases, where payment is not made, the impact on state pension could be a reduction of perhaps £4.50 per week (£234 per annum) in retirement. For a taxpayer who enjoys a long retirement the cost of that £148.20 saving now is likely to result in the loss of many thousands of state pension over the period of retirement. Whilst those on a low income may not be able to afford to pay the Class 2 NIC it should be recognised that this could have a major impact in retirement.
Special circumstances – employed and self-employed income
Under the old system, individuals who are self-employed but also have employment income are eligible to apply for deferment of Class 2 NIC.
This process is no longer required as HMRC will calculate whether any Class 2 NIC are due when the tax return is submitted. This certainly reduces the administrative burden as there will be no need to apply for deferment nor for there to be a reconciliation of the position at the end of the tax year.
If you have any queries on this topic we would be happy to assist so please give us a call to discuss.