Why I’m Concerned by the Proposal to Abolish Class 2 National Insurance Contributions

Written by Karen Bryan

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The UK Chancellor announced the proposed abolition of Class 2 National Insurance Contributions (NICs) during the next Parliament in his March 2015 Budget.

Class 2 NICs are paid by self-employed workers at a flat rate of £2.80 per week (for the tax year starting on 6 April 2015). If your self employment earnings are less than £5,965 per year, you can claim a small earnings exemption from paying Class 2 NICs. Paying Class 2 NICs counts towards building up the 35 years required to receive a full State Pension from 2016.

Self-employed workers earning above £9,060 a year  pay Class 4 NICs at a rate of 9%. However, Class 4 NICs don’t count towards building up the 35 qualifying years for a full State Pension.

Some viewed the proposed abolition of Class 2 NICs as a tax cut of around £145 a year for the self-employed and a welcome simplification of the confusing National Insurance system regime for the self-employed.

I’ve searched for more information about the new NIC regime for the self-employed following the proposed abolition. All that I can find is that Class 4 NICS will be reformed to introduce a new contributory benefit test (which I assume means paying Class 4 NICs will count towards a State Pension), and that there were be a consultation in Autumn 2015.  I suppose it also depends on which party wins the UK General Election in May 2015.

I’m left wondering how self-employed workers, with earnings below the Class 4 threshold of £9,060, will be able to pay towards a full State Pension. Maybe the Class 4 threshold will be reduced? But if that happens, the self-employed on low earnings could end up paying more in Class 4 NICs than they previously did in Class 2 NICs.

As a self-employed person, I feel left in limbo. My pension planning has already been affected by the increase in the number of years required for a full State Pension from the current 30 to 35 from April 2016. By the age of 55 in April 2014, I had paid 30 years of NICs.

I was somewhat comforted by the fact that it would only cost me around £700 in Class 2 NICs, paid over the five years, to again be eligible for a full State Pension.

Now, who knows?

Update 16 March 2016 – The UK Chancellor today announced that the abolition of Class 2 National Insurance Contributions (NICs) will take place in 2018. The abolition is still being touted as tax cut for the self-employed in the media, with no mention of the effect on the State Pension entitlement of self-employed low earners.