Interaction of Class 2 NIC and Time To Pay Arrangements

Last updated 15 February 2021 

With the extension of the Time to Pay (TTP) arrangements – and the ability to defer payments on account which were due in July 2020 - more people are likely to be paying some or all of their 2019/20 tax liabilities (which can include any Class 2 NICs) after 31 January 2021. Late payment of Class 2 NICs can result in detrimental effects on certain contributory benefits (discussed below), and on 8 February HMRC updated their guidance on deferring self-assessment payments on account to highlight the issue and how to correct it.

Background

When a taxpayer makes a payment towards their self-assessment bill, there is an order of priority which dictates how the funds received are allocated against the amounts owing.

Payments made under a TTP set up to deal with recent self-assessment debts will initially be allocated against any July 2020 payments on account before clearing Class 2 NICs due as part of the 31 January 2021 payment - i.e. the instalments will be used to pay off the oldest debt first. As soon as any July 2020 balance is paid, and instalments are being offset against the 2019/20 balancing payment then, if that includes any Class 2 liablities, the Class 2 element will be paid off first. 

But for those who have deferred their July 2020 payments, it may therefore be some time before the Class 2 NICs element is settled under a TTP arrangement.  

If a taxpayer wants to claim certain benefits, then the fact that their 2019/20 Class 2 NIC payment has been delayed might affect claims for:

  • Contributory (‘new style’) Employment and Support Allowance
  • Bereavement Support Payment
  • New State Pension (if you reach State Pension age on or after 6 April 2016)
  • Maternity Allowance (in some circumstances)

Since many people have taken advantage of deferring July 2020 payments as a result of coronavirus, this is likely to be a relatively common issue and there are two ways that a taxpayer can resolve this.

Firstly, if the taxpayer is setting up a TTP, they can ask for their first instalments to be set against their 2019/20 Class 2 NICs liabilities.  This can either be done on the phone if they are setting up over the phone or, if they are using the online service, they should set up their TTP online first, then call HMRC on the self-assessment payment helpline (0300 200 3822) who will see if it is possible to reallocate some of the payments made to date against Class 2 NICs in preference to July 2020 payments on account. This may increase the interest charges slightly but it will ensure the taxpayer’s Class 2 NICs records are updated sooner.

Otherwise, if late payment of Class 2 NICs causes an issue when the individual seeks to claim entitlement to certain contributory claims, HMRC have now set up a referral process with DWP.

Where a claim is denied because of a late payment of Class 2 NICs, the taxpayer will be advised by DWP staff to call a specific number to speak to HMRC and ask for any payments they have made to date to be redirected from their income tax bill to settle their Class 2 NICs bill. If this is possible, then the individual’s NI record will be updated within 72 hours. After that, the taxpayer can call DWP and restart their claim with an updated NI record.

Further information

There is further detail for those who have access to the Agent Forum on thread SA-7304 and a more detailed guide for taxpayers from the Low Incomes Tax Reform Group (LITRG).

 

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