Class 2 National Insurance – what’s changing from April 2024?
The last two major fiscal events (the Spring Budget 2024 and Autumn Statement 2023) have introduced significant changes to National Insurance Contributions (NICs) for both employees and the self-employed.
The changes are being introduced in stages, with employees already having seen a fall in the main rate of Class 1 NICs from 12% to 10% with effect from 6 January 2024 and a further fall to 8% due to take effect from 6 April 2024. The self-employed will also see reductions in their NIC liabilities, but later than those in employment. From 6 April 2024, the combined effect of measures from both fiscal events is that the main rate of Class 4 NICs will reduce from 9% to 6%, and Class 2 NICs will no longer be due for most self-employed individuals.
Whilst the reduction in Class 1 and Class 4 NICs are easy to understand, this article looks at the changes to Class 2 NICs, which are more complex than some of the headlines after the Autumn Statement suggested.
What are Class 2 NICs?
Class 2 NICs are currently payable at a weekly flat-rate by most self-employed individuals aged between 16 and State Pension age. They are collected via Self-Assessment, along with any tax due for each tax year.
Class 2 NICs provide entitlement towards ‘contributory’ state benefits based on how much NICs have been paid. The main contributory state benefit is the State Pension, but others include Maternity Allowance and Employment & Support Allowance.
Class 2 NICs for 2023/24
For the tax year ended 5 April 2024 (the 2023/24 tax year), Class 2 NICs are payable at £3.45 per week by self-employed people whose taxable profits are more than the £12,570 ‘Lower Profits Limit’. A full year’s worth of Class 2 NICs would therefore be £179.40 (52 weeks at £3.45 per week).
Those with profits in 2023/24 of less than £12,570 but more than the £6,725 ‘Small Profits Threshold’ do not have to pay Class 2 NICs but receive a National Insurance Credit which entitles them to the same entitlement to contributory state benefits as if they had paid Class 2 NICs.
Self-employed individuals with profits below £6,725 in 2023/24 do not have to pay Class 2 NICs either, but don’t benefit from a National Insurance Credit. They can, however, choose to pay Class 2 NICs voluntarily at the standard rate (£3.45 per week) in order to preserve entitlement to those contributory state benefits.
Some individuals pay reduced rates of Class 2 NICs, and the position of anyone who is both employed and self-employed may be different. The Low Incomes Tax Reform Group website has detailed guidance on NICs for the self-employed which covers these scenarios.
What’s changing with Class 2 NICs, and when?
The Chancellor’s announcement regarding Class 2 NICs at Autumn Statement 2023 implied that Class 2 NICs would be scrapped from April 2024. The Autumn Statement itself states that “From 6 April 2024, no one will be required to pay Class 2 self-employed NICs”.
As is often the case with tax, the position is more nuanced than the headlines might suggest.
The changes from 6 April 2024 will mainly affect self-employed people with profits above the Lower Profits Limit (£12,570). These individuals will no longer have to pay Class 2 NICs, but will still benefit from entitlement to contributory state benefits such as the State Pension. This aligns their position with those currently in receipt of the National Insurance Credit.
Self-employed individuals with profits between the £6,725 Small Profits Threshold and the £12,570 Lower Profits Limit will not be affected by the Autumn Statement 2023 announcement – they will continue to benefit from a National Insurance Credit after 6 April 2024 without having to pay Class 2 NICs, as they do now.
Self-employed individuals with profits below £6,725 will also see no changes after 6 April 2024 – they will continue to have the option of paying voluntary Class 2 NICs in order to build their entitlement to the State pension and other contributory benefits. So Class 2 has not been scrapped for this group.
Will Class 2 NICs still exist after April 2024?
Yes, Class 2 NICs will still exist but primarily to allow self-employed individuals with profits below the Small Profits Threshold to make voluntary contributions.
The rate will be frozen at £3.45 per week for the 2024/25 tax year, and the Small Profits Threshold for self-employed individuals will remain at £6,725.
According to Autumn Statement 2023, further reforms of Class 2 NICs are expected this year, with the goal of abolition. This was reconfirmed in the Spring Budget with the promise of a future consultation, but no details have been published at the time of writing.
Class 2 NICs may also remain relevant after 6 April 2024 for individuals working overseas (either employed or self-employed). Subject to meeting the relevant criteria, Class 2 NICs can be paid in these circumstances to count towards contributory state benefits. Further details are provided in HMRC’s Guidance on Social Security abroad. Most other circumstances involving voluntary payment of NICs require payment of Class 3 NICs. The benefit to those working overseas of paying voluntary Class 2 NICs, where permitted, as opposed to Class 3 NICs is that the cost is significantly lower. For the 2023/24 tax year, the Class 3 weekly rate is £17.45, compared with £3.45 for Class 2.
This article reflects the position at the date of publication (7 March 2024). If you are reading this at a later date you are advised to check that that position has not changed in the time since.