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This publication is available at https://www.gov.uk/government/publications/abolition-of-class-2-national-insurance-contributions/abolition-of-class-2-national-insurance-contributions
Who is likely to be affected
The self-employed including those who are in a partnership. Those who are not self-employed who pay Class 2 National Insurance contributions (NICs) voluntarily. Volunteer development workers and share fishermen who pay special rates of Class 2 contributions.
General description of the measure
From 6 April 2018 Class 2 contributions will be abolished and Class 4 contributions reformed to include a new threshold (to be called the Small Profits Limit).
Access to contributory benefits for the self-employed is currently gained through Class 2 NICs. After abolition, those with profits between the Small Profits Limit and Lower Profits Limit will not be liable to pay Class 4 contributions but will be treated as if they have paid Class 4 contributions for the purposes of gaining access to contributory benefits. All those with profits at or above the Class 4 Small Profits Limit will gain access to the new State Pension, contributory Employment and Support Allowance (ESA) and Bereavement Benefit.
Those with profits above the Lower Profits Limit will continue to pay Class 4 contributions.
The objectives of this reform are to:
- deliver genuine simplification for self-employed NICs payers, making self-employed NICs more transparent and easier to understand
- make sure self-employed individuals have access to contributory benefits via the NICs system
- align the treatment of different self-employed NICs payers wherever possible, so contributory benefits can be accessed on a more equal basis to make the system fairer for all
- simplify the administration of self-employed NICs
Background to the measure
Class 2 NICs are flat-rate weekly contributions paid by the self-employed to gain access to contributory benefits. The self-employed also pay Class 4 NICs on profits above the Lower Profits Limit. Class 4 NICs do not currently give access to contributory benefits.
The Summer Budget 2015 announced a consultation on the abolition of Class 2 contributions. A consultation paper setting out the government’s proposals was published on the 9 December 2015. The consultation closed on 24 February 2016.
At Autumn Statement 2016 the Chancellor confirmed that Class 2 contributions would be abolished from 6 April 2018 and published a response to the consultation paper setting out a restructuring of Class 4 NICs to allow access to contributory benefit.
This measure will have effect on and after 6 April 2018.
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 and those that can pay voluntarily. Class 2 contributions are collected alongside income tax and Class 4 contributions through self assessment. Section 11A applies income tax provisions to Class 2 contributions. Section 12 sets rules relating to the late payment of Class 2 contributions.
The structure of Class 4 contributions is set out in Sections 15 and 18 of the Social Security Contributions and Benefits Act 1992 (and its Northern Ireland equivalent).
There are also powers in Sections 117 and 119 of the Social Security Contributions and Benefits Act 1992 (and its Northern Ireland equivalent) that allow for special rates of Class 2 contributions for share fishermen and volunteer development workers.
Legislation will be brought forward to abolish Class 2 by repealing Section 11,11A and 12 of the Social Security Contributions and Benefits Act 1992 and to restructure Class 4 contributions to include the Small Profits Limit. Changes will also be made to benefit entitlement rules to allow Class 4 contributions to count for benefit entitlement purposes.
Class 3 contributions, which can be paid voluntarily to protect entitlement to the State Pension and Bereavement Benefit, will be expanded to give access to the standard rate of Maternity Allowance (MA) and contributory ESA for the self employed.
The special provisions (set out in the Social Security (Contributions) Regulations SI 2001/1004) which apply to share fishermen and volunteer development workers that allow them to pay special rates of Class 2 contributions to gain access to a wider range of benefits than currently available through Class 2 is ending with the abolition of Class 2.
Transitional arrangements will be provided to enable certain people with low profits, share fishermen and volunteer development workers to rely on their contribution record in the two years prior to Class 2 abolition for longer than usual when claiming contributory ESA and, where eligible, contribution-based Jobseeker’s Allowance. These arrangements will remain in place until 1 January 2022.
Summary of impacts
Exchequer impact (£m)
|2016 to 2017||2017 to 2018||2018 to 2019||2019 to 2020||2020 to 2021|
These figures are set out in table 2.1 of Budget 2016 and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Budget 2016.
This measure is not expected to have any significant macroeconomic impacts.
Impact on individuals, households and families
The abolition of Class 2 impacts self-employed people who do not have a full qualifying year for benefit entitlement purposes and who will now have the option to pay voluntary Class 3 contributions where in the past they may have been able to pay voluntary Class 2 contributions. Class 3 contributions are currently £14.10 per week compared to Class 2 contributions which are currently £2.80 per week. This change does not affect households or family formation, stability or breakdown. Those affected will incur one off costs to familiarise themselves with the new rules.
Certain groups who are not self-employed in the UK but who are currently able to pay Class 2 contributions voluntarily, for example self-employed people working abroad, will need to pay Class 3 contributions to gain access to the new State Pension.
The special rates of Class 2 contributions which volunteer development workers (VDWs) and share fishermen are able to pay will no longer be available. After abolition, share fishermen will be able to access contributory benefits in the same way as other self-employed people. VDWs will be able to access the standard rate of MA through Class 3, otherwise they will be in the same position as volunteer workers in the UK.
This measure will affect up to 5.4 million self-employed people who are able to pay Class 2 contributions.
Impact on business including civil society organisations
Around 3.4 million self-employed individuals with profits above the Small Profits Threshold (£5,965 in 2016 to 2017) currently have to pay Class 2 contributions of £2.80 per week. This measure represents an average annual saving for this group of £134 from April 2018.
The self-employed currently have to work with two separate classes of NICs, each with different rates and rules. This measure will mean that from April 2018 they will only have to engage with one class of NICs, delivering a simpler overall regime for the self-employed. In particular this will have a positive impact on sole traders, small partnerships and unincorporated enterprises with profits above the new Small Profits Limit.
There are estimated to be one-off costs of around £1.8 million as businesses and self-employed individuals familiarise themselves with the new rules. However, the changes are expected to reduce the ongoing administrative burden on businesses by £6.4 million per year.
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. For those with profits above the Small Profits Limit this measure is likely to have a positive impact as they will now only have to deal with one Class of contributions (Class 4) instead of Class 2 and Class 4 contributions reducing system complexity.
Estimated one-off impact on administrative burden (£m)
Estimated ongoing impact on administrative burden (£m)
|Ongoing average annual impact||(£m)|
|Net impact on annual administrative burden||-6.4|
Operational impact (£m) (HM Revenue and Customs (HMRC) or other)
The HMRC costs of implementing the changes are estimated to be in the region of £2 million for the IT changes. These could change as the full extent of the requirements is established and do not include all costs associated with the project. HMRC also expects a short-term increase in contact as customers adapt to the change, which will add to operational costs. Once abolition of the whole class of contributions is implemented, HMRC anticipates this will lead to some administrative savings.
Other impacts have been considered and none have been identified.
Monitoring and evaluation
Leading up to implementation HMRC and Department for Work and Pensions will publish guidance on the changes and raise awareness through routine marketing, publicity and other communication methods. The measure will be monitored through information collected from self assessment tax returns.
If you have any questions about this change, please contact Christopher Orton on email: firstname.lastname@example.org.