Will Class 2 National Insurance Contributions for the Self Employed Increase?

Written by Karen Bryan

£1 coin with lion rampartI’ve been looking at the proposals for changes to UK state pensions in 2016, as they mean that I’d have to pay at minimum of 35 years of National Insurance Contributions (NICs), instead of the current 30 years, to qualify for a full state pension.

As I’m self employed, I pay two different types of NICs, Class 2 at a rate of £2.65 a week on net profits up to £7,604 and Class 4 at a rate of 9% on profits over £7,605. If your profit is less than £5,595, you can apply for the small earnings exemption from Class 2 NICs. The Class 2 payments count towards several state benefits, including the Basic State Pension, while the Class 4 payments don’t count toward any state benefit. However, the 12% paid in Class 1 NICs by employees earning more than £7,650 counts towards an Additional State Pension.

The plan is that from 2016 there will be a flat rate UK State Pension of around £144 (at current values), paid to everyone who has paid in the minimum 35 years of NICs.  The Additional State Pension will disappear. If you haven’t paid the minimum 35 years of NICS, you can make up the missing years by buying Class 3 Voluntary National Insurance Contibutions which currently cost £13.25 a week (£689 a year).

It seems inequitable that the self employed earning below £7,604 and paying £137.80 a year in Class 2 NICs appear to be eligible to receive the same flat rate State Pension, when someone on the average UK salary of just under £27,000 is paying £2,322 a year in Class 1 NICs (12% of £19,350) and it costs £689 to buy a year’s worth of Class 3 Voluntary NICs.

I think that there could well be a hefty increase in Class 2 NICS from 2016.

At present, it’s looking like excellent value for the self employed with net profits of up to £5,595 not to opt for the small earnings exemption, if they have paid less than 35 years of NICs and are due to retire after April 2016.

I’d like to have the option to semi-retire and only work a few hours a week from next April when, aged 55, I’ll be able to access my stakeholder pension. I can accumulate another two years of NICs (until any possible changes in 2016) by only having pay a few hundred pounds of Class 2 NICs. However, who knows what will happen after 2016.

2 Responses to “Will Class 2 National Insurance Contributions for the Self Employed Increase?”

  1. I’ve been meaning to write about this. I have not been self employed long and I am still living off business turnover and working tax credit. I presently do not have to pay any N.I.C. but that will change in the near future.

  2. Darren, it’s not great when your income starts to increase but you then lose part of it through having to pay NICs. I think that the NICs Class 4 threshold should be the same as personal tax theshold, which is currently £9.440.