Just as employees must build up National Insurance Contributions (NICs) throughout their working life in order to access state benefits, so must those in self-employment. However, employers usually set up the PAYE system to deduct Class 1 NICs automatically for their workers, while self-employed people must pay Class 2 and/or Class 4 contributions directly to HMRC after submitting a tax return.
Following an announcement last September, the government has introduced a 1.25% increase to NICs from April 2022 – known as the Health and Social Care Levy. Despite this increase, it seems that self-employed people with profits within a certain limit could actually pay less in NICs in 2022.
Let’s look into the latest changes for self-employed NICs
and what they’ll mean for you this year.
How do National Insurance Contributions work for self-employed people?
If you need a quick refresher on the basics of National Insurance Contributions, these are payments that people earning a sufficient amount must pay between 16 years old and state retirement age. You must make a minimum amount of NI contributions throughout your lifetime to access the State Pension, certain unemployment benefits, Maternity Allowance, or Bereavement Support payments.
As mentioned, employees on a payroll will have Class 1 contributions deducted from their wages, while their employers will also contribute Class 1A/Class 1B contributions. As those who are self-employed is unlikely to have a payroll system, they must pay a different class of NICs on their profits.
This means that anyone in self-employment is required to submit an annual self-assessment tax return, which HMRC uses to calculate how much the person owes in Income Tax and National Insurance Contributions for that year. When it comes to NICs, they may have to only pay the Class 2 flat rate, but they may also be liable for the Class 4 higher rate on profits above a particular amount.
Even if your self-employment earnings are below the threshold for Class 2 and Class 4 NICs, or you are eligible for reduced rate NI contributions, you can still choose to make NIC payments if you can afford to. These voluntary contributions are categorised as Class 3, and help you to fill gaps in your NIC record that could otherwise have a negative impact on your eligibility to claim state benefits.
How are Class 2 National Insurance Contributions changing?
Previously, the threshold for fixed-rate Class 2 NI contributions was £6,515, and was due to rise to £6,725 this tax year. After the Spring March Statement, the threshold is now set at £11,908
for the 2022-2023 tax year. It’s then due to align with the Personal Allowance of £12,570 for 2023-2024.
This means that you now won’t have to pay Class 2 NICs
on self-employment earnings above the small profits threshold of £6,725. You’ll only have to make Class 2 NIC payments for any earnings over the lower profits limit of £11,908. The Class 2 NIC rate for 2022-2023 is now £3.15 a week.
If you won’t be making enough profit to pay any National Insurance Contributions, you might have concerns about maintaining your NI record. There’s no need to worry, because anyone with annual self-employment profits between £6,725 and £11,908 can benefit from deemed NI contributions.
You’ll still be building up your NIC record, even though you technically won’t be paying for those contributions. This is especially important to get enough qualifying NICs for the State Pension.
What is happening to Class 4 National Insurance Contributions?
While the 1.25% levy doesn’t apply for Class 2 NICs, it does apply for Class 4. The Class 4 NIC rates
were therefore due to increase from 9% to 10.25% for self-employment profits over £9,880. Like the Class 2 threshold changes, the Class 4 threshold now set at £11,908 instead, and will also align with the Personal Allowance for 2023-2024 (£12,570). The higher rate threshold is frozen at £50,270.
So, if you earn annual profits between £11,908 and £50,270, you’ll be liable for NI contributions at a rate of 10.25%. For profits above £50,270, you’ll now pay a reduced NIC rate of 3.25%
(up from 2% the previous year due to the levy). The threshold boost means fewer people will be liable for both Class 2 and Class 4 contributions, allowing self-employed earners to keep more of their profits.
As a self-employed earner, you’ll no longer have to make Class 2 contributions from the date that you reach State Pension age, just like employees who pay Class 1 NICs. If you’re liable for them, you’ll continue paying Class 4 contributions until the start of the next tax year following this date.
How does this affect my NIC liabilities?
According to the government’s Spring Statement factsheet, the majority of people who pay NICs will pay less than they would have before the changes. Whether they work for an employer or are self-employed, lower earners can keep more of their money whilst still protecting their NIC record.
Here are some examples of the impact of these self-employed NIC changes at various profit levels:
|
Profits |
2021/2022 |
2022/2023 (Previous) |
2022/2023 (New) |
|
£10,000 |
£197 |
£176 |
£0 |
|
£15,000 |
£647 |
£689 |
£481 |
|
£20,000 |
£1,097 |
£1,201 |
£923 |
|
£30,000 |
£1,997 |
£2,226 |
£2,018 |
If you’re still not sure about your NIC liabilities, or you need professional assistance with self-employment tax management, contact GBAC on 01226 298 298. Our accountants can provide a variety of financial services, from bookkeeping
to tax planning. When you call our team, or email us at info@gbac.co.uk, we can help you to make the most of the changing NIC thresholds in 2022.