Class 2 National Insurance Contributions
Who is likely to be affected?
Self-employed people who may be liable to pay income tax and National Insurance
Contributions (NICs).
General description of the measure
The measure will change the mechanism for collecting Class 2 NICs. It will enable self-
employed customers to pay their Class 2 NICs through Self Assessment (SA) alongside
income tax and Class 4 NICs.
The measure will also change the structure of Class 2 NICs so that only those with profits
(chargeable to tax under Chapter 2, Part 2 Income Tax (Trading and Other Income) Act
2005) above a profits threshold will be liable - those without profits or with profits below this
threshold will be able to pay Class 2 NICs voluntarily.
Policy objective
As part of a long-term trend, the number of self-employed individuals in the UK is growing,
with more people having multiple jobs and moving in and out of self-employment. Having two
separate collection methods for Class 2 and Class 4 NICs causes confusion and extra work
for both the self-employed and HM Revenue & Customs (HMRC). The policy objective is to
modernise the way Class 2 NICs is assessed and collected, making the system simpler and
more straight-forward and reducing administrative burdens on the self-employed and HMRC.
Background to the measure
The Office of Tax Simplification recommended that the Government review the National
Insurance processes for the self-employed and in particular, recommended collecting Class
2 NICs through SA.
In 2013 the Government consulted on this proposal to improve processes and simplify the
way that Class 2 NICs are collected and received strong support to collect Class 2 NICs
through the SA system.
The Government published its Summary of Responses in December 2013 and announced
this measure at Budget 2014.
Detailed proposal
Operative date
The measure will have effect from April 2015. Class 2 NICs will be collected through SA from
April 2016, for the 2015-16 tax year onwards. The current six monthly billing system will
cease from April 2015.
Current law
Section 2(1)(b) of the Social Security Contributions and Benefits Act 1992 (and its Northern
Ireland equivalent) define a “self-employed earner” for the purposes of paying Class 2 NICs.
Section 11 of the Act defines those that are liable to pay class 2 NICs including those that
are excepted from paying and may pay voluntarily.
Proposed revisions
Legislation will be introduced in the NICs Bill 2014 to ensure that from April 2015 liability to
pay Class 2 NICs will arise at the end of each year (currently Class 2 NICs liability arises on
a weekly basis).
Those with no profits chargeable to tax (under Chapter 2, Part 2 ITTOIA 2005) or profits
below the new Small Profits Threshold (equivalent to the current Small Earnings Exception
level) will no longer have to apply in advance for an exception from paying Class 2 NICs.
Instead they will have the option to pay Class 2 NICs voluntarily at the end of the year as
liability will not automatically arise.
The amount of Class 2 NICs due, which will still be calculated based on the number of
weeks of self-employment in the year, will be determined when the individual completes their
SA return and paid alongside their income tax and Class 4 NICs. For those that wish to
spread the cost of their Class 2 NICs, HMRC will retain a facility for them to make regular
payments throughout the year.
There are a small number of customers who do not have to report their income through the
self-employed section of the SA process. HMRC will be retaining a process to allow these
groups to continue paying Class 2 NICs under the new arrangements.
Summary of impacts
2014-15 2015-16 2016-17 2017-18 2018-19
- negligible negligible negligible negligible
Exchequer
impact (£m)
This measure is expected to have a negligible impact on the Exchequer.
Economic
impact
The measure is not expected to have any significant economic impacts.
Impact on
individuals
and
households
Moving the collection of Class 2 NICs into SA does not create any
monetary winners or losers.
This change represents a positive impact on the self-employed in terms of
simplifying the collection process for Class 2 NICs.
Equalities
impacts
This aim of this measure is to have a positive impact on those who pay
Class 2 NICs and will be neutral in respect of equalities impacts.
Impact on
business
including civil
society
organisations
This change is aimed at simplifying NICs for the self-employed and small
businesses, for example sole traders, partnerships and unincorporated
businesses, by enabling them to report their Class 2 NICs liability and pay it
through their SA, thus reducing the administrative burden of two separate
collection mechanisms that currently exist.
Government expect that around 5 million self-employed people will benefit
from this measure. It is expected that the resulting reduction in
administrative burden placed on self-employed people will be around £19
million per year.
There are 1.4m businesses currently paying their Class 2 NICs liability
through direct debit payments. We anticipate a small number may want to
continue to make their Class 2 NIC payments through a regular payment
option. A cost of £90,000 has been attributed to this group and this cost is
included in the ‘one off compliance cost’ figure of £15m.
Estimates of this one-off cost are shown in the table below, including an
estimate of total saving for a five year period at present value PV.
Impact on Administrative Burden (included in Net Compliance Benefit)
Cost
Time Period
Compliance Cost
One-Off Costs £15m N/A
Average Annual Cost N/A N/A
Total Costs (PV) £15m N/A
Compliance Benefits N/A N/A
One-off Benefit N/A N/A
Average Annual Benefit £19m 5
Total Benefit (PV) £89m 5
Net Compliance Benefit
(NPV)
£74m 5
Impact on Administrative Burden (included in Net Compliance Benefit)
Increase Decrease Net Impact
£0 £19m £-19m
The above table shows a net saving figure of £74m over the five year
period.
Operational
impact (£m)
(HMRC or
other)
HMRC Impacts
: The HMRC costs of implementing the changes are
estimated to be in the region of £5 million for IT changes. HMRC estimates
that once the new process is fully implemented there will be administrative
savings of around £6 million per year.
Department for Work & Pensions (DWP) Impacts
: DWP will also incur
implementation costs estimated to be in the region of £300,000 with
additional annual running costs in the region of £100,000 are estimated in
respect of processing benefit claims that are impacted by the changes.
Other impacts
Small and micro business assessment
: This measure is aimed at reducing
the administrative burden on the self-employed and small businesses, for
example, sole traders, partnerships and unincorporated enterprises. This
measure is likely to have a positive impact on this group as they will now be
able to assess their Class 2 NICs liability and pay it through the operation
of SA. It will not impact the way in which NICs is collected for the people
they may employ.
The self-employed and small businesses should ultimately save time by
being able to deal with their tax and NICs in one go, although they will have
to familiarise themselves with this new process to collect Class 2 NICs
through SA. This will be facilitated by HMRC updating the SA form and
accompanying guidance and other internal and external guidance to staff
and customers.
Other impacts have been considered but none have been identified.
Monitoring and evaluation
The measure will be evaluated on an on-going basis leading up to and following
implementation. HMRC's NICs team, in collaboration with delivery partners, including DWP,
will support customers affected by this change through amending internal and external
guidance and making customers aware of changes through routine marketing, publicity and
other communication methods.
HMRC will also use its partnership with intermediary and representative groups and
organisations to cascade changes, as appropriate.
Further advice
If you have any questions about this change, please contact Shell Makwana on
03000 586480 (email: [email protected])
Declaration
David Gauke MP, Financial Secretary to the Treasury, has read this Tax Information and
Impact Note and is satisfied that, given the available evidence, it represents a reasonable
view of the likely costs, benefits and impacts of the measure.
