Following yesterday’s announcement by the government that it has abandoned its plans to abolish Class 2 National Insurance contributions (NIC) for the self-employed, campaigners have said the whole area of National Insurance needs a comprehensive review.
The government said they had abandoned the reform – which had been due to take effect from April 2019 – 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.
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 their 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 have stated they will keep this issue under review. This is welcome. Public understanding of NI is low as is evidenced by the LITRG websites; 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.”
The self-employed currently pay two types of NIC, depending on their profits. They pay Class 2 contributions of £2.95 per week if their annual profits exceed £6,205 and they also pay Class 4 NIC at the rate of 9% on profits above £8,424. Once profits reach £46,350, Class 4 NI contributions fall to 2% on the excess profits.
Class 2 contributions may also be paid voluntarily by self-employed people who earn less than the threshold – and many choose to do so as it gives them rights to various state benefits, most notably the state pension.
The government had planned to abolish Class 2 NIC and instead change the rate and threshold for paying Class 4 NIC. Those Class 4 contributions paid or credited would then count towards state benefits. Unfortunately, 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 NIC 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.