What do we mean by self-employed NICs?
National Insurance Contributions (NICs) for the self-employed fall into two ‘Classes’ – Class 2 and Class 4.
Class 2 is a fixed weekly sum, regardless of profits from the trade (apart from those on very low incomes who may qualify for an ‘exception’). It is normally payable at a rate of £2.30 per week from 6 April 2008, but there are other special rates for share fishermen and volunteer development workers.
Class 4 is a percentage charge on profits. For 2008/09, it is payable at 8% on profits between £5,435 and £40,040; and at 1% on profits above £40,040.
The collection methods for Classes 2 and 4 are very different; the former is paid regularly (usually by monthly direct debit or quarterly cheque); and the latter through self assessment. Further complications creep in if the taxpayer is both employed and self-employed, as employees pay Class 1 NIC on their earnings and the interaction with Classes 2 and 4 is highly complex.
More information can be found here.
What are the proposed changes?
HMRC are considering integrating the collection methods of self-employed NIC. Broadly, the suggestion seems to be to include Class 2 in the self assessment system, but to retain the distinction between Classes 2 and 4.
What was our response?
The NIC system is a patchwork of policy decisions made by successive governments over many years. Its original intention was for contributors to build up entitlement to various welfare benefits (that is, those benefits which are ‘contributory’ – for example the state retirement pension and incapacity benefit, amongst others), but now the situation is less clear-cut as only Class 2 provides such entitlement; Class 4 is really just an additional income tax.
Because of this history, the system now lacks logic and contributors are likely to be confused as to both the purpose and complicated workings of the system. In our experience, confusion leads to mistakes.
HMRC’s consultation proposals only address NIC collection methods and do nothing to evaluate or improve contributor understanding. Our response therefore urges that HMRC engage in a more fundamental review of the system, working with the Department for Work and Pensions (which deals with the benefits side of the equation). This is likely to produce an improved system for the longer term which is based on specific needs of customers.
Use this link to read our full response
(11-06-2008)
Contact Name: Kelly Sizer (Tel: 0844 579 6700 Fax 0844 579 6701)
