As part of the Autumn Budget, the chancellor announced changes to class 2 national insurance for the self-employed from April 2024. For many of us, it means we will no longer have to pay class 2 NICs (woohoo!) but, for some, it may not be scrapped after all.
Here, I’ll explain how the changes to class 2 national insurance work, how to ensure you protect your access to state benefits and what it means for calculating your self-employment tax.
Table of Contents
What is Class 2 National Insurance?
Until 5 April 2024, Class 2 NICs were a flat rate amount paid by self-employed individuals to protect their ability to claim certain state benefits such as:
- Basic state pension;
- New state pension;
- Contribution-based employment and support allowance
- Universal credit;
- Maternity allowance;
- Bereavement Support Payment.
Class 2 NICs for the tax year 2023/24 were payable at £3.45 per week where taxable profits exceeded £6,725 (the small profits threshold). They were paid via self-assessment, alongside class 4 national insurance and income tax. And below the small profits threshold, sole traders were given the option on their tax returns to pay class 2 voluntarily to avoid gaps on their national insurance record.
What are the Changes to Class 2 National Insurance?
The changes to class 2 national insurance will affect self-employed individuals slightly differently depending on their business profits. But it has not been scrapped, as many are suggesting. Here’s how each group of people are affected:
Group 1: Business Profits Above £12,570
From 6 April 2024, those with business profits above £12,570 (the lower profits limit) will no longer have to pay Class 2 NICs but will be treated as though they had paid their contributions. This protects their entitlement to state benefits like the basic state pension, maternity allowance and ESA as if they had paid it as before.
Group 2: Business Profits Between £6,725 and £12,570
From 6 April 2024, self-employed individuals with business profits between £6,725 (the small profits threshold) and £12,570 (the lower profits limit) will not have to pay class 2 NICs but will, as in previous tax years, continue to benefit from a national insurance credit.
Group 3: Business Profits Below £6,725
For self-employed people with business profits below the small profits threshold of £6,725, will not receive a national insurance credit or be deemed to have paid their national insurance.
Just like in previous years, these individuals can choose to pay class 2 national insurance voluntarily at £3.45 per week to protect their entitlement to state benefits.
Paying class 2 NICs can be more advantageous than paying class 3 NICs at £17.45 per week to top up their national insurance record.
FAQs
What is the difference between Class 2 and Class 4 national insurance?
Class 2 national insurance counts towards a person’s entitlement to state benefits such as basic state pension and maternity allowance. Class 4 contributions paid by self-employed people with business profits of £12,570 or more do not count towards state benefits and instead is generally considered a type of tax.
What is the difference between Class 2 and Class 3 national insurance?
Class 2 national insurance, of £3.45 per week, is paid or is deemed to be paid by self-employed people to protect entitlement to state benefits. Class 3 national insurance, of £17.45 per week, is a voluntary payment all individuals can pay to top up their national insurance record but only counts towards the basic state pension and new state pension.
Want to Read More About Self Employment Tax?
If you’ve enjoyed this post you may like to read more about self-employment tax. Here are some of my most popular blog posts on this topic…
- Self Employed Tax: An Easy Guide for Beginners (2024)
- UK Tax Brackets and Income Tax Bands 2023-24
- The UK 60% Tax Trap Explained (63% in Scotland)
- Claiming Self-Employed Expenses
Any Questions?
I’d love to help if you have any questions about this topic. Feel free to ask over in my group ‘The Self-Employed Club‘.
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