NIM74250 - Class 2 National Insurance contributions: special cases: property and investment income
Sections 2(1)(b), 11(2), 11(6) and 15 of the Social Security Contributions and Benefits Act (SSCBA) 1992
Chapter 2 of Part 2 of the Income Tax (Trading and Other Income) Act (ITTOIA) 2005
This guidance explains how to establish the Class 2 NICs position for property and investment income from 6 April 2015. For guidance on the Class 2 NICs position before 6 April 2015, see NIM23800.
A self-employed earner is defined at section 2(1)(b) of SSCBA 1992 as “a person who is gainfully employed in Great Britain otherwise than in employed earner’s employment (whether or not he is also employed in such employment)”.
In tax year 2015 to 2016, Class 2 underwent several changes, known as Class 2 reform. From 6 April 2015 ‘relevant profits’ are used to determine whether a person is liable to pay Class 2 NICs. Relevant profits are those profits in respect of which Class 4 NICs are payable under section 15 of SSCBA 1992:
- profits from a trade, profession or vocation
- profits chargeable to Income Tax under Chapter 2 of Part 2 of ITTOIA 2005
For more information on relevant profits please see NIM70300 and NIM24001.
The nature of property letting requires some activity to maintain the investment, but that is not enough to make it gainful employment for self-employed NICs purposes. For example, being a landlord normally involves:
- undertaking or arranging for external and internal repairs
- preparing the property between lets
- advertising for tenants and arranging tenancy agreements
- generally maintaining common areas in multi-occupancy properties; or
- collecting rents.
In order for a property owner to be gainfully employed for self-employed NICs purposes, their property management activities must extend beyond those generally associated with being a landlord (which include, but are not limited to, the above).
For example, ownership of multiple properties, actively looking to acquire further properties to let, and the letting of property being the property owner’s main occupation could be pointers towards there being gainful employment for self-employed NICs purposes.
If a property owner has an agent who manages their property for them, the activities the agent undertakes should be attributed to the owner. ‘Agent’ includes a friend or family member, as well as a professional managing agent. However, a property owner will only be gainfully employed for self-employed NICs purposes if the activities the agent undertakes for them (ignoring any other clients they might have) are enough to meet the definition of gainful employment for self-employed NICs purposes.
From 6 April 2015 there are still 3 tiers of activity in relation to those undertaking property or investment related activities, however only those individuals who fall under tier 3 are liable to pay Class 2 NICs, subject to their profits levels.
Tier 1
A person whose activities in managing the property are those generally associated with being a landlord (see above) with little additional activity would not meet the definition of gainful employment for self-employed NICs purposes in section 2(1)(b) of SSCBA 1992 (although they may have been taxed on their property or investment income under Self Assessment (SA)). Such individuals are not liable to pay Class 2 NICs and also are not entitled to pay Class 2 NICs voluntarily, but they may be able to pay Class 3 NICs. The majority of landlords will fall under tier 1.
Examples
Samantha lets out a property that she inherited following the death of her great aunt. This is not gainful employment for self-employed NICs purposes. Samantha falls under tier 1; she is not required to pay Class 2 NICs, and she is also not entitled to pay Class 2 NICs voluntarily.
Claire owns multiple properties that she rents out. She spends around half her working time carrying out duties as a landlord and is not looking to increase the number of properties she owns. If the only duties that Claire undertakes are those normally associated with being a landlord, then this is not gainful employment for self-employed NICs purposes. Claire falls under tier 1; she is not required to pay Class 2 NICs and is also not entitled to pay Class 2 NICs voluntarily.
Hasan purchases properties using “buy to let” mortgages. He places all letting duties in the hands of a property letting agent who acts as landlord on his behalf. If the only duties that the property letting agent undertakes for Hasan are those normally associated with being a landlord, then this is not gainful employment for self-employed NICs purposes. Hasan falls under tier 1; he is not required to pay Class 2 NICs and is also not entitled to pay Class 2 NICs voluntarily.
Tier 2
A person with a substantial undertaking in property or investment related activities would meet the definition for gainful employment for self-employed NICs purposes in section 2(1)(b) of SSCBA 1992. However, liability to pay Class 2 NICs only arises if the earner has ‘relevant profits’. ‘Relevant profits’ for this purpose are the profits for Class 4 NICs purposes, that is profits from a trade, profession or vocation. A person in this tier would not pass the trade, profession or vocation test for an Income Tax charge to arise under Chapter 2 of Part 2 of ITTOIA 2005 on their profits and would therefore not be liable to pay Class 2 NICs under section 11(2) of SSCBA 1992 (although they may be taxed on their property/investment income under SA). Section 11(6) of SSCBA 1992 provides that these individuals are entitled to pay Class 2 NICs voluntarily.
Example
Bob owns 10 properties which he lets out to students. He works full time as a landlord and is continually seeking to increase the number of properties he owns for letting. Bob’s activities meet the definition for gainful employment for self-employed NICs purposes, so he falls under tier 2. However, Bob does not have ‘relevant profits’ as the earnings are not profits from a trade, profession or vocation and as a result is not liable to pay Class 2 NICs, but he is entitled to pay Class 2 NICs voluntarily under section 11(6) SSCBA 1992.
Tier 3
A person who has a specific trade, for example running a hotel or a guest house meets the definition for gainful employment for self-employed NICs purposes and passes the trade, profession or vocation test for an Income Tax charge to arise under Chapter 2 of Part 2 of ITTOIA 2005 on their profits. Such individuals are liable to pay Class 2 NICs under section 11(2) SSCBA 1992 and are also liable to pay Class 4 NICs under section 15 SSCBA 1992, if their profits exceed the relevant thresholds.
Examples
Amy owns and runs a bed and breakfast and is therefore considered to be carrying out a trade. Amy is liable to pay Class 2 NICs, and also Class 4 NICs if her profits exceed the relevant thresholds.
Nadiya owns and runs a hotel and is therefore considered to be carrying out a trade. Nadiya is liable to pay Class 2 NICs, and also Class 4 NICs if her profits exceed the relevant thresholds.
Activities that amount to a trade for Income Tax purposes could also include for example a landlord who operates a shop and self-service launderette in a retirement village or caravan park.
For further information on what can be considered a trade see PIM4300.
From 6 April 2022 to 5 April 2024 A Class 2 NICs liability only arises where the self-employed earner has relevant profits exceeding the Lower Profits Threshold (LPT). Where a self-employed earner does not have relevant profits or their relevant profits are below the SPT, Class 2 NICs can be paid voluntarily to protect entitlement to State Pension and certain benefits. Where the self-employed earner has relevant profits from the SPT to the LPT they will be treated as having actually paid Class 2 NICs. From 6 April 2024 The LPT was removed which means that liability to pay Class 2 NICs no longer exists. A self-employed earner with profits equal to or above the SPT is treated as having actually paid Class 2 NICs. A self-employed earner with profits below the SPT can still choose to pay Class 2 voluntarily.