What does the reduction in national insurance mean for the self-employed and their state pensions? Steve Webb answers
NI rebate: Self-employed people will have to wait until the start of the new tax year on April 6, 2024
Now that class 2 has been abolished, how can a self-employed person contribute to his or her state pension rights?
And how do they know that what they’ve contributed will be enough each tax year, without having to wait months for it to show up in their records?
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Steve Webb replies: As you may know, self-employed people currently pay two ‘classes’ of national insurance contributions.
The first is the flat-rate ‘Class 2’ contributions for those who have annual profits of more than £12,570 per year. The current rate for Class 2 NICs is £3.45 per week.
The second is profit-related ‘Class 4’ contributions, also for people with profits of more than £12,570 per year. The contribution rate is 9 percent on profits between £12,570 and £50,270, and 2 percent on the balance above that.
It has always been the case that it is the class 2 premiums that count towards the accrual of a state pension. Class 4 premiums are in principle only a profit tax and do not entitle you to an AOW benefit.
The Autumn Statement announced that national insurance contributions for the self-employed will be reduced.
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While the cuts for salaried employees took place in January 2024, self-employed people will have to wait until the start of the new tax year on April 6, 2024.
How will NI contributions change for the self-employed?
The Chancellor announced that Class 2 premiums would be completely abolished from 2024/2025, while the main rate of Class 4 premiums would be reduced from 9 percent to 8 percent.
While this is good news in terms of the amount you now have to pay, it is a fair question to ask what this all means for your NI record and future state pension rights.
The good news is that, provided your profits for the year are above the current ‘small profits threshold’ of £6,725, your National Insurance Account will be credited as if you had actually paid Class 2 contributions.
People earning between the small winnings threshold (£6,725) and the lower winnings limit (£12,570) will already receive credits this way without having to pay Class 2 premiums, and from April 2024 this will also apply to those earning more than £12,570. Good.
For those who were self-employed but had profits below the small profit threshold, it remains possible to pay voluntary Class 2 contributions, even though mandatory Class 2 contributions have been abolished.
If there is uncertainty or delay in calculating your profits for a particular year and this is only resolved after your tax return has been processed, you can still make voluntary contributions for the year in question if this proves necessary. , provided you do this within normal time limits.
Important warning: check your NI details NOW to ensure you have paid the correct premium class
On the wider issue of national insurance details of those who are self-employed or in small businesses, I would encourage you to check your national insurance details now to ensure it is accurate.
You can do this by visiting the gov.uk website: Check your National Insurance file.
The reason why this is important is that many self-employed people use accountants or bookkeepers to deal with their affairs with HMRC, including paying any tax or NI that is due.
I’ve lost count of the number of times I’ve heard of self-employed people retiring and discovering huge gaps in their NI record.
Often this turns out to be related to periods when their accountant was handling these matters on their behalf and they simply assumed everything was fine, when in fact this was not the case.
Unfortunately, the responsibility lies with each individual to ensure that he or she has paid the correct amount of National Insurance, and it can be difficult or even impossible to resolve matters long after the event.
Checking now that your NI record is current and accurate can save you a lot of grief later.