Protect your benefit entitlement if you are self-employed

Published on 16 December 2015

If you are self-employed, entitlement to some state benefits depends on the level of Class 2 National Insurance contributions paid in the period leading up to a claim. New rules mean that your Class 2 National Insurance contributions for the current tax year won’t be collected until 31 January 2017 unless you take action – and that could restrict your claim to benefits such as Maternity Allowance or, in some circumstances, Employment and Support Allowance.

What has changed?

Until very recently, Class 2 National Insurance contributions were paid by self-employed workers monthly or 6-monthly, by direct debit or by payment of a bill issued twice a year. The contributions were paid mostly during the tax year to which they related with the balance paid by the end of July following the tax year. The last payments under these rules was for the 2014/15 tax year (ended 5 April 2015) with the final payments being made in July 2015.

For the current tax year (2015/16), Class 2 National Insurance contributions are not due to be paid until 31 January 2017 along with the rest of your tax bill due on that date as they will now be included as part of your self assessment payment. Therefore they will not be paid until some nine months after the end of the tax year to which they relate.

Which benefits might not be paid to me if I don’t pay my National Insurance contributions early?

Eligibility for certain state benefits relies on you having paid a certain amount of National Insurance contributions within a defined time. For self-employed workers this will be their Class 2 contributions. The two benefits that are most likely to be affected are Maternity Allowance and in some specific circumstances, Contributions-based Employment and Support Allowance (‘ESA’).

Maternity Allowance

Entitlement to maternity allowance is based on National Insurance contributions paid in the 66 weeks before the baby is due. This period is known as the test period.

There are two levels of maternity allowance:

The standard rate for which you must be self-employed for 26 weeks in that test period and have paid Class 2 National Insurance contributions for 13 of them; and

The lower rate for which you must be self-employed for at least 26 weeks in that test period and have earnings of at least £30 per week on average.

As an example, if your baby was due in August 2016, then you would have had to pay sufficient contributions in the 66 weeks leading up to that date – broadly from May 2015 to August 2016. Payment of your class 2 National Insurance contributions for the tax year 2015/16 is not due until 31 January 2017, so these contributions would not have been paid at the time you make a claim for Maternity Allowance.

Although the Class 2 contributions are not due until 31 January 2017, you can choose to pay them early. Paying early contributions may mean you will have paid enough to receive standard rate of maternity allowance.

If you have not paid your contributions early or have not paid enough, when you make the claim for maternity allowance, you will be given the opportunity to make a lump sum payment of class 2 contributions to enable you to claim the standard rate Maternity Allowance if appropriate – HMRC will work out how many weeks contributions need to be paid and then issue a bill for this amount.

ESA

ESA is paid to be people who are unable to work due to illness. Normally, in order to be paid ESA in the current benefit year (which runs from January to December) you must have paid the following National Insurance contributions:

  • In one of the previous two complete tax years before the benefits year, you must have paid 26 weekly contributions;  AND
  • In both of those two previous complete tax years, you must have paid or been credited with 50 weekly contributions.

As an example, in order to claim ESA now in December 2015, you must have paid at least 26 weekly contributions in either of the two tax years 2012/13 and 2013/14. In addition, you must have paid or been credited with 50 weekly contributions for both of those tax years.

In reality this change is only likely to affect you if you claim ESA between the first Sunday in January and 31 January in a year because only at that time are you unlikely to have paid the contributions necessary.

It is important that you pay your National Insurance contributions early so that your claim is not delayed, if you need to.

You should note that there are some exceptions to the above contributions conditions for ESA but the information here covers most situations.

What if my self employed profits are low?

You need to be very careful if your earnings are low and below the small profits threshold of £5,965 (for 2015/16) as you do not have to pay Class 2 National Insurance contributions in this situation. However you can still ‘opt in’ to pay these contributions to protect your entitlement to benefits in the future including the state pension.

How do I pay my contributions early?

You need to contact HMRC and arrange to make payment.

You can also set up a Budget Payment Plan that will allow you to pay your contributions monthly by direct debit. Again you need to contact HMRC about this. You may find this helpful if you think that paying all of your National Insurance contributions in a lump sum may cause you financial difficulty.

(16-12-2015)

Contact: Gillian Wrigley (please use form at /contact-us) or follow us on Twitter: @LITRGNews