New Style ESA Voluntary Class 2 NIC Contributions

Hi Anon12345

You will need to check you meet the criterion of qualifying remunerative work for exemption from Conditon 1 as per WORKING TAX CREDIT REGULATIONS 2002 — Regulation 4.

I would also have a read of the changes to NI contributions and NI credits in this article from the charity LITRG.

Changes to Class 2 NICs: the implications for traders with lower profits

From 2022/23, self-employed individuals with profits falling between the small profits threshold and lower profits limit benefit from Class 2 NICs ‘treated as paid’. Those with profits below the small profits threshold may need to make voluntary Class 2 NICs to secure a qualifying year.

What does it mean for me?

Traders may wish to understand whether they can bring their profit level over the small profit threshold.

What can I take away?

A trader’s overall tax position should always be borne in mind, as should their potential access to NI credits already given under the benefits system.

It has been a busy year for changes to National Insurance contributions (NICs). Following Rishi Sunak’s Spring Statement, in April 2022 we saw the rates of both Class 1 and Class 4 NICs increase by 1.25 percentage points as a precursor to the (now abandoned) Health and Social Care Levy. The rates were then brought back down again following Kwasi Kwarteng’s September 2022 ‘Mini Budget’ – one of the few measures not reversed by his replacement, Jeremy Hunt! For the self-employed paying Class 4 NICs on an annual basis, the rate has been set at an averaged 9.73%.

Planted in the middle of the rate changes, in July 2022 the National Insurance payment threshold for employed workers was increased to align with the personal allowance. For the self-employed, this change resulted in an annualised lower profits limit (the point at which both Class 4 and Class 2 NICs becomes payable) of £11,908 for the 2022/23 tax year, but this will follow the personal allowance from 2023/24 onwards.

With all of the above, it is easy to overlook a lesser discussed change that came out of the Spring Statement relating to Class 2 NICs for lower earning self‑employed individuals. For these purposes, ‘self-employed individuals’ means sole traders and individual partners in partnerships. In the government’s Spring Statement document, the measure was described as follows:

‘The government is also taking steps to ensure that self-employed individuals with lower earnings fully benefit. Spring Statement announces that from April 2022 self-employed individuals with profits between the small profits threshold and lower profits limit will continue to build up National Insurance credits but will not pay any Class 2 NICs.’

Class 2 NICs are important for the self-employed, as they are the determining factor for having a ‘qualifying year’ for state pension entitlement and contributory state benefits.

The effect of the Spring Statement changes for self-employed individuals is as follows:

Situation A: Those with tax adjusted profits over the lower profits limit (£11,908 for the 2022/23 tax year and in line with the personal allowance in future years) will be required to pay Class 2 NICs as normal, at a rate of £3.15 per week.

Situation B: Those with tax adjusted profits below the lower profits limit, but more than the small profits threshold (£6,725 for the 2022/23 tax year), will not be required to pay Class 2 NICs, but will be treated as having paid Class 2 NICs for the year. (We discuss below exactly what is meant by this.)

Situation C: Those with tax adjusted profits below the small profits threshold will not be treated as having paid Class 2 NICs, so may need to pay voluntary Class 2 NICs (at the same rate of £3.15 per week) if they wish to maintain their entitlement to contributory state benefits.

Consequently, those with the very lowest profits (situation C above) will potentially need to pay voluntary Class 2 NICs if they are to secure a qualifying year for National Insurance purposes, whereas a person with slightly higher profits, up to £11,908 (situation , will not need to pay anything to have a qualifying year.

So what could this mean in practice?

National insurance: ‘credits’ versus ‘treated as paid’

As noted above, the Spring Statement documents all referred to National Insurance ‘credits’. However, the National Insurance Contributions (Increase of Thresholds) Act 2022 s 3(2) sets out the intention that those with profits below the lower profits limit will be treated as though they had paid Class 2 NICs. This is actually quite different to receiving a National Insurance credit.

Note that the legislation referenced above merely provides that the Treasury may make provision that a person with profits under the lower profits limit is treated as having made Class 2 contributions, and that these regulations can apply with retrospective effect to no earlier than 6 April 2022. The regulations themselves have not yet appeared.

What are National Insurance credits?

There are two types of ‘National Insurance credits’: Class 1 NI credits and Class 3 NI credits. They are available in certain circumstances where people are not able to work or might only have a limited ability to work; and where they receive certain means-tested benefits (including working tax credit). The type of credit received will dictate the benefit that the recipients will obtain:

Class 1 NI credits count towards state pension entitlement and some other state benefits.

Class 3 NI credits count towards state pension entitlement only.

A list of the different circumstances qualifying for each type of National Insurance credit is available on GOV.UK (see bit.ly/3TTmNNE).

What is National Insurance ‘treated as paid’?

The concept of National Insurance being ‘treated as paid’ was already in existence for Class 1 NICs. Employees earning over the lower earnings limit but beneath the primary threshold are treated as having paid Class 1 NICs without actually having to physically make a payment.

The concept now being introduced for Class 2 NICs purposes is broadly similar. However, it could be argued that the opportunity to fall inside or outside the band in which it applies (between the small profits threshold and the lower profits limit) depends on rather more subjective principles, since the calculation of taxable trading profit relies on certain decisions being made relating to allowable expenditure and tax adjustments.

It is worth pointing out here that chargeability to Class 2 NICs is aligned with the profits as chargeable to income tax under the Income Tax (Trading and Other Income) Act (ITTOIA) 2005 Part 2 Chapter 2.

Let me know how you get on.
David