Budget 2017 – National Insurance

Employees and directors

Class 1 NIC

Employees will pay class 1 National Insurance at 12% on income above £157 per week, and 2% on income of above £866 per week.

Employers will pay 13.8% secondary class 1 National Insurance on all employment income paid to employees in excess of £157 per week.

Self-employed

Class 2 NIC

Class 2 NIC has to be paid per week of self-employment where profits for the year are expected to be above £6,025 in 2017/18.  The rate of class 2 NIC for 2017/18 is £2.85 per week.  This class of National Insurance is payable in January after the tax year ends, usually alongside personal tax payments for the year.  Contributions can also be paid voluntarily in order to build up qualifying years towards state pension and other benefits.

The Chancellor confirmed that class 2 NIC will be abolished with effect from April 2018, so 2017/18 will be the last year for making these contributions.

Class 4 NIC

Class 4 National Insurance at the rate of 9% will be payable on self-employed profits between £8,164 and £45,000.  The rate will be 2% for profits of above £45,000.  This National Insurance is payable with direct tax payments in January and July each year.

The Chancellor also announced that the rate of class 4 NIC would increase from 6 April 2018, but this change has since been reversed.

Class 3 NIC

These are voluntary contributions paid by people who want to maintain their entitlement to certain state benefits and accrue qualifying NI years towards their state pension.  From 2017/18 the rate of class 3 contributions will be £14.25 per week.

Entitlement to state pension and other benefits

Class 2 NICs are currently the main route for self-employed individuals to get NI credits towards their state pension and other contributory benefits.  For example, you currently need 35 years of NI contributions to obtain a full state pension.

As announced previously, class 2 national insurance contributions will be abolished from April 2018, saving each self-employed individual around £150 per year.

People who are self-employed will be able to build up qualifying years towards their state pension through their class 4 contributions, or voluntary class 3 contributions and NI credits.

NI credits are given to individuals in certain situations – for example recipients of child benefit for children aged under 12, recipients of Carer’s Allowance, of Working or Universal Tax Credits or Jobseekers’ Allowance.  In most cases this is automatic, but in some cases an application has to be made to receive NI credits.

The Government has proposed that individuals with profits above the class 2 threshold but below the class 4 threshold (using the 2017/18 thresholds, this would be profits between £6,025 and £8,164) will have a zero rate of class 4 contributions.  So, they would pay no class 4 NI but would get credits towards their State Pension and contributory benefits.

People whose profits are below the class 4 threshold and who are not eligible for NI credits will need to pay class 3 contributions in order to accrue entitlement to State Pension and other contributory benefits.

In summary, for self-employed people from 2018/19:

  • Class 4 contributions (rather than class 2 contributions) will give you a qualifying year of National Insurance contributions towards your state pension and other benefits.
  • If your profits are up to £2,000 lower than the class 4 threshold, you may still get National Insurance credits without having to pay anything – the exact thresholds will be announced with 2018/19 rates and allowances.
  • People who are currently eligible for NI credits will continue to receive them.
  • If you do not qualify for class 4 NI credits or other NI credits, and do not get NI credits through employment income, you may need to pay voluntary class 3 National Insurance to get a qualifying year towards your state pension or other benefits.
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