Should I Voluntarily Pay Class 2 National Insurance? Depending on your profits from self-employment you may not need to pay Class 2 National Insurance. But you do have the option to pay it voluntarily. So why would anyone pay something they don’t have to? Let’s look at why.
Who Needs to Pay Class 2 National Insurance?
When you are self-employed you need to pay Class 2 National Insurance if your business profits are over a certain amount known as the small profits threshold.
Once you cross the threshold you must pay Class National Insurance at a fixed weekly rate.
You can choose to pay this amount once a year when you file your self-assessment tax return.
Here are the current Class 2 National Insurance rates:
|Small profits threshold – no NICs below this threshold||£6,365||£6,205|
|Class 2 National Insurance||£3.00 per week||£2.95 per week|
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).
What is Class 2 National Insurance For?
When it comes to deciding whether you want to voluntarily pay Class 2 National Insurance, it helps to understand what exactly you are paying for.
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 (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 If 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 basically means tax years where you fail to pay 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.
Here’s how you might be affected if you choose not to voluntarily pay Class 2 National Insurance:
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, so 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.
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.
Should I Voluntarily Pay Class 2 National Insurance If I am 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|
|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 voluntarily paying Class 2 national insurance?
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.
Anita is a Chartered Accountant with over a decade of experience taking self-employed business owners from financially confused to business savvy.
She is the creator of the ‘Go Self Employed’ website, which is her corner on the internet where she makes self-employment less terrifying.