DND Accountancy Services
For all your accountancy needs
Class 2 National Insurance
Class 2 National Insurance Contributions are paid by self-employed earners normally resident in the UK and aged between 16 and the state retirement age. They are payable at a flat rate per week (£2.80 per week in 2015/16) Starting from the 2015/16 year, they are paid through the self-assessment tax return, at the same time as the tax. The old arrangements, whereby they are paid to HMRC monthly by direct debit or quarterly on receiving a bill in the post, are being phased out. They are not considered to be a business expense and so are not allowed as a deduction against tax.
A self-employed earner may also be liable to pay which is calculated as a percentage of business profits each year, and dealt with separately.
Where a self-employed earner also has an employment, they may pay enough NI through their job to reach the maximum NI that a person is required to pay in a year. Typically, with a single employment, this happens when the annual salary is over £35,000. In this case, there is no need to pay any Class 2 NI. Any Class 2 NIC that is overpaid may be refunded later, or an application may be made to defer the payment of the Class 2 payments by using form CA72B
Payment of Class 2 NI counts towards Incapacity Benefit, the Basic and New State Pension, Contribution-based Employment and Support Allowance, bereavement benefits and Maternity Allowance.
Small Earnings Exception
A person with low self-employed earnings may apply for exemption from having to pay, called the Small Earnings Exception (SEE). In 2015/16, the earnings limit is £5,965. The SEE is granted where last year’s earnings were less than last year’s limit, and this year’s earnings are expected to be less than this year’s limit. Except for new businesses, evidence of the earnings for the previous tax year may need to be supplied.
The earnings used for determining whether the SEE is available are based on generally accepted accounting practice, rather than profits adjusted for income tax purposes. Note that it is the profit, rather than the turnover, which is relevant. Profits from more than one self-employed business are added together, and losses may be offset against profits. Any earnings from employment are ignored.
The exemption is usually granted for 3 years, but for a new business it is usually only granted for the current tax year. Generally claims can be made to backdate the exemption for up to 13 weeks, but if this would include part of a previous tax year, the exemption will only be granted if it is specifically requested and no payments have been made for the earlier year (and the person is entitled to the SEE for the earlier year).
It is also not possible to backdate a claim to cover a period for which payments have already been made. However, between 6 April and 31 January following a tax year, a claim can be made to refund all Class 2 payments if the person qualified for the SEE for that year. The claim is made in writing, enclosing evidence of earnings, to:
HM Revenue & Customs
National Insurance Contributions Office
Self Employment Services
Benton Park View
Newcastle Upon Tyne
A self employed person is entitled to pay voluntary Class 2 payments, even for periods which are covered by an SEE. They would choose to do this if they want to ensure their entitlement to certain benefits which depend on having a National Insurance payment record.
Other exemptions from Class 2 NICs
There are various other reasons why a person may not be required to pay for a particular week – these include:
• In respect of the whole of which they are in receipt of sickness benefit, invalidity benefit or incapacity benefit;
• Throughout the whole of which they are incapable of work;
• In respect of which they are in receipt of maternity allowance;
• Throughout the whole of which he or she is undergoing imprisonment or detention in legal custody;
• In respect of any part of which he or she is in receipt of invalid care allowance;
• In respect of the whole of which they are a Volunteer Development Worker;
• A married woman or widow has a valid election not to pay Class 2 NI.
Interest is not charged on late payment, but payments that are made later than 12 months after the end of the tax year are payable at the rate in force at the time. As the weekly payment rate increases most years, this will result in a higher payment being due. The requirement to pay at higher rates is sometimes waived if the delay is due to ignorance or error, and the person exercised due care and diligence.