In April 2015, the Government announced it intended to abolish class 2 National Insurance Contributions and replace them with a new system for the payment of Class 4 NICS. On 5th December they published more detail.
Broadly this will mean that a self-employed individual with low-profits will still accrue rights to the state pension even if he/she is not paying national insurance. It will just be a lot simpler and the key new thing is a profit tester.
The reforms aren’t due to come into force till at earliest April 2018 but mean that those with profits below the Small Profits Threshold would need to make use of National Insurance Credits or Class 3 voluntary contributions to keep up their entitlement to the state pension.
You will get credits if you are a parent of children under 12
You are getting carer’s allowance
You are unemployed and getting jobseeker’s allowance
You are getting incapacity benefits
You are getting workers credit or universal credit
Tax campaigners have warned that the abolition of Class 2 National Insurance contributions from April 2018 (which the Government has now confirmed will go ahead) will result in the lowest earners among the self-employed potentially paying five times more than they do now to secure entitlement to a state retirement pension.
At present, self-employed earners whose profits exceed £5,965 a year (the small profits threshold) are required to pay Class 2 NI contributions at £2.85 a week, which count towards their state retirement pension and entitlement to certain other contributory benefits. If their profits fall below the small profits threshold, they are currently able to opt into paying Class 2.
From April 2018, when Class 2 is abolished, payment of Class 4 NI contributions will count towards state benefits. In order to protect some on low incomes, Class 4 contributions will not be payable until annual profits reach £8,060 but as long as profits exceed the small profits threshold, the self-employed will be given Class 4 credits – in other words they will be treated as making contributions even though none was actually paid. This places them in a similar position to employees on low incomes who receive NI credits.
Class 4 NI cannot be paid on a voluntary basis, though, meaning that the only way that self-employed people on profits below the Class 4 threshold will be able to build up a contribution record will be by paying Class 3 voluntary contributions at £14.10 a week.
Anthony Thomas, Chairman of LITRG, said:
“Some parts of these proposals are good news for self-employed workers on low earnings, but by no means all. Those with profits between £5,965 and £8,060 will be better off because they will pay no NI but be credited with contributions. Our concern is for those with lower earnings than £5,965 who would have to pay voluntary Class 3 contributions in the future to protect their benefits entitlement if they did not obtain NI credits through receipt of other benefits, for example tax credits, child benefit or Universal Credit. Class 3 contributions will cost almost five times the amount they are paying now (£14.10 per week compared to £2.85 per week) and may mean the cost is unaffordable, leading them to rely more on means-tested benefits in the future.”
Some structural changes are to be made to enable self-employed people to claim Maternity Allowance at the standard rate: currently they have to pay Class 2 NI contributions, but they will be required to pay three Class 3 NI contributions (currently £42.30 in total) to access the standard rate of the allowance. These Class 3 NI contributions will be able to be offset against their ultimate Class 4 NI liability for the year.
Anthony Thomas continued:
“Maternity allowance is a vital benefit for mothers-to-be who are self-employed and we welcome the Government’s proposal to set the cost of qualifying contributions against Class 4 liabilities. This does of course mean that something else will have to be done for those on the lowest earnings who do not pay Class 4 and we urge the Government to make it as easy as possible for them to qualify.”
At the same time as these changes are coming in, another part of Government , the Office of Tax Simplification (Chaired by Angela Knight) will be looking at what we mean to be self-employed. This week they set out their intentions in a blog
Focus on the ‘Gig’ economy:
What does it mean in terms of tax?
The ‘Gig’ economy (and its near-relative, the ‘Sharing’ economy) has been much in the news this year. The Chancellor mentioned it in the Autumn Statement; Parliament’s Business, Energy & Industrial Strategy Committee announced a project; and the Prime Minister has asked Matthew Taylor, Chief Executive of the RSA to carry out a study.
The OTS does not seek to compete in any way with all these activities. We are publishing a Focus Paper* to raise some of the tax issues and implications that arise from the gig economy. In doing so we are seeking to promote discussion on the issues and to ensure that tax aspects are considered.
Gig, Sharing & Platforms
These are not synonymous; in short:
‘Gig’ is where organisations and independent workers contract for short-term engagements
‘Sharing’ in this context means generating money by sharing or renting out assets
‘Platform’ is the use of IT systems to facilitate/connect opportunities for gig/sharing
Employment rights are important…. There is much debate about the employment rights of those working in the gig arena. This was the focus of the recent Uber employment tribunal case but the case will not decide on whether the workers are employed or self-employed for tax purposes. …but we want to raise the tax issues
The OTS considers that tax issues are raised by gig working (and to an extent by sharing) in a number of ways, especially as one’s status for tax and for employment rights are not always the same:
the individual worker who contracts for a gig:
are they employed or self-employed for tax purposes?
How do they interact with the tax system?
Is the system simple for them?
the platform operator:
could they become more involved beyond simply sorting out their own tax position?
the individual or company who is offering the gig:
does the hirer have any role?
HMRC: the tax system has existing rules,
systems to gather data and ways of assessing that will apply to those working in the Gig and Sharing Economies, just as to the generality of taxpayers.
But what of the practicalities? What about knowing who the individuals are in the first place and then managing the increased monitoring load?
does gig working mean lower tax receipts, particularly of employer NICs?
This is really important stuff, it impact on us, on our families and on society. I am pleased that the Government are making such an effort to understand what is going on in the world where Government has previously not been present.
Some will think this unnecessary interference but I would side with Frank Field who has called for the self-employed to be included in thinking as , as much part of our working population, as those who are included in the PAYE system.
This blog is about pensions and I will continue to focus on the pension aspects of the new legislation. It is becoming clearer how the self employed will build their entitlement to the new state pension, now we need to be clear how they will get access to the new workplace pensions and whether this access will deliver an entitlement.
Thanks again to Kate Upcraft for kicking my arse to write about this!