UK Self-Employed National Insurance Tax Cut

It’s not every day that the government promises a tax cut. So, if you’re self-employed, you might have been waiting for the 2018/19 tax year with bated breath. Back in 2016, the Chancellor of the Exchequer announced a National Insurance tax cut for the self-employed as from April 2018 — this year.

But how did that work out?Well, April 2018 has come and gone without any National Insurance tax cuts. And, just in case you were still hoping for one, the government has now announced there’ll be no tax cut for the foreseeable future after all.Here’s a rundown of the proposed National Insurance tax cut, why it fell through and how it might be reshaped in future.

Self-employed National Insurance in the UK: a Quick Refresher

Before we get down to brass tacks, here’s a quick refresher on how self-employed National Insurance works in the UK.When you’re self-employed, you typically have to pay two types of National Insurance, depending on your profits (your income after deducting allowable expenses):

• Class 2 National Insurance, which applies if your profits are £6,205 or more a year
• Class 4 National Insurance, which applies if your profits are £8,424 or more a year

Categories for Class 2 and Class 4 National Insurance apply if you’re a sole trader or in a partnership. On the other hand, limited liability companies (LLC) don't fall under these rules.

If you do business as a liability company, you’re considered an employee of your company. Which means you’d pay Class 1 National Insurance — the  same rate you’d pay if you were in full-time employment.

How Much National Insurance do I Pay if I’m Self-Employed?

The current Class 2 and Class 4 National Insurance rates are:

• Class 2: £95 per week
• Class 4: 9 percent on profits between £8,424 and £46,350
• two percent on profits over £46,350.

Calculating Self-employed National Insurance: Example 1

Let’s say you’ve just gone self-employed. In 2018/19, you’ll be working 10 weeks in total and expect to turn a profit of £7,000.This is over the £6,205 minimum threshold, known as the lower earnings limit, for Class 2 National Insurance. However, it’s under the minimum threshold for Class 4 National Insurance. So, you’d have to pay only Class 2.

Since you’ll be working only 10 weeks, you’ll have to pay £2.95 multiplied by 10. So, £29.50 in total.

Calculating Self-employed National Insurance: Example 2

Let’s say you worked the full tax year and made a profit of £15,000.This means you’d have to pay both Class 2 and Class 4 National Insurance. However, because you earned less than £46,350, only the 9 percent Class 4 bracket would apply.So, your tax bill for 2018/19 would be:

• £153.40 Class 2 National Insurance (£2.95 multiplied by 52 weeks)
• £1,350 Class 4 National Insurance (9 percent of £15,000)

So, you’d have to pay £1503.40 in total.

Calculating Self-employed National Insurance: Example 3

Now, let’s say you were self-employed for the full tax year and made a profit after tax of £50,000.This means you’d have to pay Class 2 National Insurance and Class 4 National Insurance at both bands.

‍You’d pay as follows:

• Class 2 National Insurance: £153.40 (£2.95 multiplied by 52 weeks)
• Class 4 National Insurance: £4,171.50 (9 percent of £46,350) + £73 (2 percent of the remaining £3,650)

So, your National Insurance bill would amount to £4,397.90 in total.

What Was The Proposed National Insurance Tax Cut for the Self-employed?

The government’s plan was to scrap Class 2 National Insurance altogether. The reasons for this included:

• Making National Insurance simpler for the self-employed
• Putting all self-employed people on an equal footing
• Making the system fairer
• Making it easier for HMRC to administer self-employed National Insurance contributions

When the government first introduced the measure, it was also planning to hike up Class 4 National Insurance. This was supposed to go up from nine percent to 10 percent in April 2018 and to eleven percent in April 2019.

The reason for the Class 4 National Insurance tax hike was to put the self-employed on a more equal footing with full-time employees. As Chancellor Philip Hammond put it at the time: “It's only right and fair we should take a small step to close the gap between the treatment of employed and self-employed people.”

‍You won’t be surprised to hear, though, that the move caused a considerable uproar. The government cancelled the policy just a week after it announced it.Alas, the Class 2 National Insurance tax cut has now been shelved too.

Why Has the Government Scrapped the Class 2 National Insurance Tax Cut?

The government scrapped the Class 2 National Insurance tax cut because of the hugely negative impact it would’ve had on low-income earners.In theory, ditching Class 2 National Insurance would mean paying HMRC £153.40 a year less. But, for many low-income earners, scrapping it would’ve actually raised their tax bill by as much as 400%.Sounds confusing? Let us explain.As things stand, you need to pay Class 2 National Insurance to have access to the following state benefits:

• State pension
• Maternity allowance
• Bereavement support payment
• Contribution-based Employment and Support Allowance, which provides you with an income if you have a disability or disease that makes it difficult for you to work full-time (or work at all)

Start Tracking Your Miles With MileIQWith no Class 2 National Insurance in place, low-income earners would’ve had to start paying Class 3 National Insurance to qualify for these benefits. Class 3 National Insurance payments are voluntary payments you can make to fill gaps in your National Insurance record. The problem is that they’re much higher than Class 2 National Insurance payments, which means they’d have had a huge impact on low-income earners’ take-home pay.

How Removing Class 2 National Insurance Would Work: Example

Let’s say you make a profit of £7,000 a year after deducting allowable expenses.As things stand, this income is below the £8,424 threshold, which means you don’t have to pay Class 4 National Insurance. However, you pay Class 2 National Insurance, which amounts to £2.95 per week.

Your income is also below the annual personal allowance, which means you don’t have to pay any income tax. So, your total tax bill for 2018/19 would be just £153.40.Now, let’s imagine the Class 2 National Insurance tax cut had gone ahead.Assuming you still made £7,000 a year after expenses, you’d typically have two options.

Option one would be not to pay any National Insurance. The problem with this option is that it could leave you with gaps in your National Insurance record. And, this could mean that you won’t be able to qualify for a state pension or the other benefits we’ve outlined above.

Option two would be to pay Class 3 National Insurance. The problem with this option is that Class 3 National Insurance is £14.65 a week. This means you’d have to pay £761.80 — £608.40 more than what you’d pay in Class 2 National Insurance. Which would leave you with a take-home pay of £6,238.20.Start Tracking Your Miles With MileIQ

What Would Have Been the Impact of the Class 2 National Insurance Tax Cut?

According to the Office for National Statistics, self-employed low-income earners in the UK totalled 967,000. And this was back in 2016.Not everyone would have seen their take-home pay go down. You could opt not to pay any National Insurance and still get a state pension and other benefits if you qualify for National Insurance credits.

That said, to qualify for National Insurance credits if you’re self-employed, you must fulfil at least one of the following criteria:

• be eligible for and apply to get Working Tax Credits or Universal Credit
• be on Employment Support Allowance
• have a child aged 12 or under and be registered for Child Benefit or be a foster carer
• get a Carer’s Allowance because you care for someone at least 35 hours a week and they’re on disability benefits

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Does the Government Have Plans to Reshape the Class 2 National Insurance Tax Cut?

Nobody knows. To date, nothing new has been announced. What’s for sure, is that the government has said it’ll shelve the tax cut during this Parliament. This means Class 2 National Insurance is here to stay until at least 2022 when the next general election is scheduled to take place.

That said, while a tax cut being scrapped is usually bad news, this is probably the exception. In the words of Spencer McDonald, national secretary for BECTU, the media and entertainment trade union:“Scrapping Class 2 NIC [National Insurance Contributions] would have seen the bill for low-paid freelancers who want to qualify for the state pension shoot up to £761.80 a year, from £153.40 at present. It could also have affected anyone who goes through a spell of low earnings and loses their annual NIC credit, so many of our members will be spared worry about their state pension rights."Many other organisations welcomed the government’s decision not to scrap Class 2 National Insurance too.

So, it turns out, a tax cut isn’t always a positive thing after all. Who knew?