HR · 7 September 2018

Chancellor breaks Class 2 NICs promise and lands £1bn tax on self-employed

Class 2 NICs
Class 2 NICs are used to accrue entitlement to state pension and benefits

As chancellor Philip Hammond scraps a planned tax break for 3.4m self-employed workers, small business bodies have branded it a betrayal of the UK’s sole traders.

The abolition of Class 2 National Insurance Contributions (NICs) was initially tabled by former chancellor George Osbourne in 2016, and later delayed by his successor until April 2019.

Now, the Treasury has pledged to maintain the tax in a bid to raise an additional £435m a year for the NHS.

What are Class 2 NICs?

Self-employed and freelance workers earning beneath the £6,205 threshold aren’t required to pay Class 2 NICs, but voluntary payments build entitlement to the state pension and benefits such as the employment and support allowance (ESA).

Around 3.5m people were expected from the tax cut, valued at £134 per year if they made a profit of over £6,205 a year. At the current rate of £2.95 per week, Class 2 NICs are valued at £150 a year.

In the three years to 2021, Class 2 NIC payments are expected to earn the Treasury over £1bn.

Responding to the tax u-turn, Mike Cherry, chairman of the Federation of Small Businesses (FSB), said it raised “serious questions” about the government’s commitment to supporting the self-employed.

“Class 2 NICs is a regressive levy that indiscriminately hits sole traders and makes life even tougher for those who are hard-up. Once you’ve reached a minimal income, there’s no tapering or means testing in place at all,” Cherry said.

“As things stand, you can be earning below the living wage and still paying two sets of NICs as a self-employed person. All the while you’re wrestling with a Universal Credit system that’s trying to strong-arm you into full-time employment.

Commenting on the chancellor’s decision Julia Kermode, chief executive of The Freelancer & Contractor Services Association, said: “This is very disappointing and another blow for self-employed people on low incomes who can least afford it.

“The government is justifying its move through concern for those self-employed people who voluntarily pay Class 2 NICs to gain access to a state pension.”

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Class 2 NICs

 

Failure to scrap Class 2 NICs will cost millions of entrepreneurs this tax year

The Federation of Small Businesses warned that four million entrepreneurs will find themselves £150 worse off because of a failure to scrap Class 2 National Insurance Contributions.

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Cherry added: “As things stand, you can be earning below the living wage and still paying two sets of NICs as a self-employed person. All the while you’re wrestling with a Universal Credit system that’s trying to strong-arm you into full-time employment.

“Rather than hitting more than three million self-employed people with this levy, the Treasury should have worked harder to develop more effective ways to protect around 300,000 low-earners and maintain their contributions for the state pension.

“The self-employed were promised in no uncertain terms that this niggling tax would end but have been left high and dry: little thanks for the £270 billion they contribute to the economy each year.

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ABOUT THE EXPERT

Praseeda Nair is the editorial director of Business Advice, and its sister publication for growing businesses, Real Business. She's an impassioned advocate for women in leadership, and likes to profile business owners, advisors and experts in the field of entrepreneurship and management.

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