In the 2022 Spring Statement, Chancellor Rishi Sunak announced major changes to National Insurance contribution thresholds. If you are self-employed, the new rules governing both Class 4 and Class 2 NICs are likely to affect you.

However, a number of our clients have asked us whether the changes will affect their entitlement to benefits such as the state pension, maternity allowance and employment and support allowance.

To answer this question, this post takes a detailed look at the changes to NICs and how they will affect the self-employed.

What are the changes?

Before the Spring Statement, most self-employed people paid two classes of National Insurance contribution. Class 2 NICs of £3.15 per week were payable if your profits reached the Small Profits Threshold of £6,725. Class 4 NICs kicked in when your profits exceeded the Lower Profits Limit of £9,880. You’d pay 10.25% on profits between £9,881 and £50,270 and 3.25% on profits beyond the latter figure.

One oddity about the NICs system was that the Lower Profits Limit was £9,881 while Income Tax was only payable on profits over £12,570. In other words, if you made a profit between those two figures, you’d pay Class 4 NICs but not Income Tax.

The Chancellor decided to address this anomaly in his Spring Statement. In a nutshell, he announced that no-one would have to pay National Insurance until their profits reached £12,570 – the same figure at which they begin to pay Income Tax.

When are the new Class 4 and Class 2 NICs being introduced?

The new threshold for Class 4 NICs is being introduced on 6th July 2022. On that date, the Lower Profits Limit increases to £12,570. However, during the 13 weeks between the beginning of the financial year and 6th July, the LPL remains at £9,880. This results in an LPL of £11,908 for the 2022/23 tax year, which will rise to the full £12,570 during 2023/24.

The changes to Class 2 NICs came into effect on 6th April 2022. If you make a profit of under £11,908 for this tax year, you won’t pay Class 2 NICs. Similarly, if your profits are under £12,570 during 2023/24, you won’t pay them.

What about my benefit entitlements?

If you find that you no longer have to pay Class 2 NICs, you may be wondering whether you will still be entitled to benefits such as the state pension. The good news is that you will be if you earn above the Small Profits Threshold of £6,725 – you’ll build up NI credits at a 0% rate.

You may also be wondering whether you can make voluntary Class 2 NICs. Again, the answer is ‘yes’. You are most likely to want to do this if your self-employed profits are below the SPT of £6,725. However, we do recommend you speak to your THP accountant for advice on making voluntary contributions.

Don’t forget NICs are also going up

Although many people will no longer have to pay NICs, those who do may find themselves with a larger bill. This is because of the National Insurance hike designed to raise extra money for the NHS and social care. The BBC calculates that anyone earning up to about £34,000 per year will pay less National Insurance. People earning over that will pay more. For example, if you earn £50,000, you’ll pay £197 more over the year.

Summary

In short, the changes are good news if you are self-employed with relatively low profits. If you earn below the Lower Profits Limit, you will no longer have to pay Class 2 NICs. Similarly, the increase of the LPL to match the Income Tax personal allowance will mean some people will no longer have to pay Class 4 NICs either. However, if you’re a higher earner, the new NI increase will mean you’ll be paying more. If that’s the case, you may want to take advantage of our Tax Planning service.

Need further advice on any of the topics being discussed? Get in touch and see how we can help.

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About Karen Jones

Having worked for one of the world’s largest accountancy firms, Karen Jones uses her tax knowledge and skills to help clients obtain substantial reductions to their tax liabilities.

With an expanding portfolio of tax clients, Karen enjoys the variety her work brings her and particularly likes working with new businesses and people. With a growing number of tax clients, she frequently faces a variety of challenges and relishes the experience she gains as she solves them.

Karen likes the THP ethos: “I like the way the team has a professional, but friendly and down-to-earth approach – it creates a productive atmosphere that benefits everyone.”

Karen’s specialist skills:

  • Personal Taxation
  • Tax Efficient Planning
  • Trust Administration
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