Are you wondering if you should pay Class 2 NICs voluntarily? Does paying Class 2 NIC voluntarily seems like a strange thing to do?
Why wouldn’t anyone decide to pay tax if they didn’t have to?!
Well, when it comes to Class 2 NICs, there are some really good reasons why you may want to pay them voluntarily.
Especially in light of the recent Coronavirus situation where many self-employed and sole traders have found themselves unable to claim universal credit.
How Much is Class 2 National Insurance?
When you are self-employed, you need to pay Class 2 NICs if your business profits are over a certain amount. This is called the small profits threshold.
Once you cross the threshold, you must pay Class 2 NICs at a fixed weekly rate.
You can choose to pay this amount once a year when you file your self-assessment tax return, along with your self-employment tax bill.
Here are the current Class 2 National Insurance rates:
| 2022/2023 | 2021/2022 | |
|---|---|---|
| Small profits threshold – no NICs below this threshold | £6,725 | £6,515 |
| Class 2 National Insurance | £3.15 per week | £3.05 per week |
Example
Jack works out that his profit from self-employment for the tax year 2018/2019 is £4,000.
When Jack fills out his tax return, he will be asked whether he wants to pay voluntary Class 2 National Insurance contributions.
If he chooses yes, an additional amount will be included in his tax calculation.
For 2018/2019 this additional amount will be £153.40 (£2.95 x 52 weeks).
Why Pay Class 2 National Insurance?
Class 2 National Insurance is paid by the self-employed to protect their ability to claim certain state benefits.
These state benefits are:
- Basic state pension;
- New state pension;
- Contribution-based Employment and Support Allowance and more recently Universal Credit due to the Coronavirus (financial support if you have an illness or disability);
- Maternity Allowance (a special maternity pay arrangement for individuals who are self-employed);
- Bereavement Support Payment.
What Happens When You Don’t Pay Class 2 National Insurance?
Regardless of whether your self-employment business made a profit or a loss, failing to pay your Class 2 National Insurance will show as a “gap” on your National Insurance record.
A gap is a tax year where you fail to pay the appropriate type of National Insurance.
The impact of this “gap” can mean you put yourself at risk of how much state benefit you can claim, if at all.
New State Pension
Under the New State Pension Rules, you can only claim the full state pension (currently £168.60 per week) if you have made 35 qualifying years of National Insurance contributions.
A qualifying year means one tax year (6 April to 5 April).
This may be made from Class 1 or Class 2 National Insurance contributions. Therefore, if you were employed then this will count towards your ability to claim the state pension.
If you have less than 35 qualifying years, when it comes to claiming your state pension, then the full amount will be pro-rated.
You must have at least 10 qualifying years on your National Insurance record to make a claim at all.
Log into your Personal Tax Account to check your National Insurance Record.
Maternity Allowance
When you are employed you are entitled to Maternity Pay from your employer.
But when you are self-employed you can claim an equivalent payment known as the Maternity Allowance, assuming you meet the criteria to be eligible.
The Maternity Allowance Rates for 2018/2019 that you could get are:
- £148.68 a week or 90% of your average weekly earnings (whichever is less) for 39 weeks
- £27 a week for 39 weeks
- £27 a week for 14 weeks
To claim the full amount of Maternity Allowance you must have paid Class 2 National Insurance for at least 13 of the 66 weeks before your baby is due.
If you have not paid enough Class 2 National Insurance to get the full rate of £148.68 a week, you’ll get £27 a week for 39 weeks.
You can claim Maternity Allowance once you’ve been pregnant for 26 weeks and can ask for the fortnightly or monthly payments to start 11 weeks before your baby is due.
How to Pay Should I Pay Class 2 NICs Voluntarily
When you fill out your self-assessment tax return, you can choose to pay class 2 NIC as part of finalising the self-employment section of your return.
Once you have entered details of your self-employment you’ll be presented with this screen, where you can choose:
Paying Class 2 National Insurance If You are Employed and Self-Employed?
When you are employed, your employer will deduct Class 1 National Insurance from your salary if you meet the thresholds for paying it.
Class 1 National Insurance is also a contribution toward state benefits.
Here are those state benefits, alongside Class 2:
| Benefit | Class 1 | Class 2 |
|---|---|---|
| Basic State Pension | Yes | Yes |
| Additional State Pension | Yes | No |
| New State Pension | Yes | Yes |
| Contribution-based Jobseeker’s Allowance | Yes | No |
| Contribution-based Employment and Support Allowance | Yes | Yes |
| Maternity Allowance | Yes | Yes |
| Bereavement Support Payment | Yes | Yes |
So the question is if you are employed and self-employed are you paying twice towards the same benefits? Should bother with voluntary Class 2 NICs?
Generally speaking, you do need to pay both Class 1 and Class 2 National Insurance.
But each tax year, there is a maximum amount of National Insurance every individual needs to pay to protect their entitlement to state benefits called the Annual Maximum.
The Annual Maximum for National Insurance
In an attempt to ensure that anyone who is employed and self-employed do not end up paying more national insurance than someone who is employed.
It means you could claim for a refund of Class 4 National Insurance and Class 2 National Insurance.
Read more about the Annual Maximum
Wrapping Up
Paying Class 2 NICs voluntarily may feel like an extra cost but chances are your future self will thank you.
If you don’t pay into the ‘pot’ you can’t expect to receive money back out from it.
Start by reviewing your national insurance record in your personal tax account to check for any NIC gaps.
Then consider whether you need to top up your NICs. Unless you really do not have the cash or are receiving benefits that give you national insurance credits such as Working Tax Credit.
