Reform of National Insurance for the self-employed

The 2016 Budget confirmed the government's intention to abolish Class 2 National Insurance contributions (NICs) from April 2018. This means that instead of paying two classes of NICs (Class 2 and Class 4), the self-employed will pay just one in the future.

Class 2 NICs currently provide the self-employed with access to a range of state benefits:

• the Basic State Pension
• Bereavement Benefits
• Maternity Allowance
• Contributory Employment and Support Allowance

To ensure that the self-employed can continue to access these benefits through the NICs system, the government has issued a consultation to consider how self-employed individuals could build entitlement through Class 4 NICs.

Class 2 NICs

Class 2 NICs are currently flat-rate weekly contributions (£2.80 per week in 2016-17). They are paid through self assessment alongside income tax and Class 4 NICs if the person's profits for that tax year equal or exceed the Small Profits Threshold (£5,965 per annum in 2016-17).

Payment of Class 2 is voluntary for those with profits below this level.

Class 4 NICs

Class 4 NICs are paid by the self-employed on net profits that are subject to income tax. They are payable at a rate of 9% on profits between the Lower Profits Limit (£8,060 in 2016-17) and Upper Profits Limit (£43,000 in 2016-17), and 2% on profits above the Upper Profits Limit.

They do not currently provide entitlements to contributory benefits. Class 4 contributions were introduced so the self-employed would pay a fairer share of the costs associated with providing contributory benefits.

The way ahead

In the 2016 Budget, the government confirmed it will reform Class 4 NICs, so that self-employed individuals continue to build entitlement to the State Pension and other contributory benefits, following the abolition of Class 2 NICs. The government will set out its plans for the contributory benefit tests in the near future.