Accountants call for clarity over scrapping of class 2 NICs

Top 40 accountants Bishop Fleming are calling on the government to be open and honest about its plans to reform National Insurance Contributions (NICs) paid by the self-employed.
The firm fears that the promised £145 a year saving for the self-employed from the scrapping of Class 2 NICs in April 2018 will be cancelled out by a corresponding tax rise. Whilst some will be better off, many could face an effective tax rise of up to 2%

The self-employed currently pay both Class 2 NICs at the rate of £2.80 per week and 9% Class 4 on profits, where earnings exceed £8,060. But only Class 2 buys entitlement to state benefits, such as the Employment and Support Allowance and State Retirement Pension; Class 4 is a straightforward tax.

As part of the government’s long-term plan to align National Insurance with income tax, it wants to scrap Class 2, meaning Class 4 will have to be reformed so that the self-employed can continue to buy entitlement to benefits.

Bishop Fleming claims the government is not being open on the reforms it is going to make, and is hiding behind reports by the Office of Tax Simplification (OTS) on tax and NIC alignment as an opportunity to increase taxes on the self-employed.

Whereas business owners currently pay 9% Class 4, employees and directors pay 12% Class 1. The accounting firm says the Chancellor is very likely to close the 3% gap by increasing Class 4 under the auspices of giving the self-employed the same benefit rights as employees that they would otherwise lose after the demise of Class 2. That would be a 33% increase in the rate.

Bishop Fleming partner, Andrew Browne commented: “The Chancellor looks likely to use the OTS reports to justify this large tax rise. Whereas there is currently a tax lock on increases to NICs before 2020, this only applies to Class 1 paid by employees. Class 4 were left out of the lock, so allowing Philip Hammond to increase Class 4 in line with what employees pay.”

Mr Browne cited the example of a self-employed person currently earning £43,000 a year (the Class 4 upper earnings threshold) would have to pay an extra £900 in Class 4 NICs – that’s an extra 2% in tax, even after the Class 2 saving.

The Bishop Fleming partner added: “The Chancellor will seek to justify the rise on the grounds of simplification – as NIC and tax rates will then be the same – yet this will not actually simplify anything; it just increases the tax take.”

According to Mr Browne, the government is likely to say the increase will give the self-employed access to the same state benefits as employees. However, Mr Browne remarked: “The majority of self-employed have made clear in past surveys they did not want to buy these extra benefits, so they will be sold something they don’t actually want. What they do want is the £145 a year saving they were promised.”

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