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Saturday, 11 March 2017

SELF-EMPLOYED NATIONAL INSURANCE BENEFITS

UPDATED 15 MARCH 2017 AFTER HAMMOND U-TURN

Self-employed people pay two sorts of National Insurance contributions (NICs). They are called Class 2 and Class 4 contributions. Class 4 contributions are a percentage rate of tax on profit. It is 9% on profits between £8164 and £45,000 of 9%. A 2% rate applies above £45,000. The Government has now abandoned plans to raise the 9% rate to 10% from April 2018 and to 11% from April 2019 which would have brought Class 4 more in line with the 12% Class 1 paid by employees on the same band of income. So self-employed people get a considerable subsidy by paying less tax for almost identical benefits.

Class 2 is a flatrate £2.85 a week from April, 2017. Class 2 used to be paid weekly but from April 2015 has been paid after the end of the tax year either with self-assessment or as a one off payment of £148.20 which HMRC will ask for in October after the end of the tax year. . 

At the moment only Class 2 gives entitlement to the state pension and other benefits. Class 2 will be abolished from April 2018. The government is planning to use Class 4 contributions as the key to getting benefits. At the moment Class 2 has to be paid if profits are above £6025 a year. The Government plans to introduce a new 0% rate of Class 4 between £6025 and £8164 to ensure that entitlement to benefits does not change.

Class 2 contributions give entitlement to all the main National Insurance benefits paid out of the National Insurance Fund.
  • New State Pension - £159.55 a week with 35 years of contributions. Some people who have been employed will get less than that.
  • Contributory Employment & Support allowance of £73.10 a week. It can start seven days after you are incapable for work and lasts up to 12 months as long you are too sick to work.
  • Maternity Allowance of £140.98 - or 90% of your weekly earnings if that is less. It lasts for 39 weeks. Because it depends on Class 2 contributions it can be more difficult to qualify now that the payment is annual. If you haven't paid enough at the right time you must claim first and then HMRC will tell you how to pay the Class 2 you need to qualify. Crazy but true. Full details here. I am told that self-employed mothers on Maternity allowance have tougher restrictions on doing any work while claiming it than employed women.
  • Bereavement Support Payment if your spouse or civil partner dies. It is £2500 with 18 monthly payments of £100 if there are no children or £3500 with eighteen monthly payments of £350 if there are dependent children. This benefit applies for deaths from 6 April 2017. Benefits for earlier deaths are very different.

Class 2 contributions do not give entitlement to the following benefits which are paid out of the National Insurance Fund.
  • Contributory Jobseeker’s Allowance of £73.10 a week. It last for 26 weeks and involves strict conditions on looking for work. However, self-employed people who give up their self-employment and register with JobCentre Plus can claim means-tested Jobseeker's Allowance if they fulfil the conditions.
  • Redundancy payment. This is paid by an employer when an employee is made redundant. But if the employer goes bust or otherwise cannot pay it then the payment comes from National Insurance Fund. There is no equivalent for the self-employed who go out of business.

Class 2 contributions do not, of course, give entitlement to benefits which are paid purely by an employer not by the National Insurance Fund.
  • Statutory Sick Pay £88.45 for 28 weeks. Employers may pay much more than the statutory amount. Self-employed can get Employment & Support Allowance - see above. 
  • Statutory Maternity Pay. It is 90% of average weekly earnings (before tax) for six weeks then £140.98 (or 90% of weekly pay if that is less) for the next 33 weeks. However, self-employed people can get Maternity Allowance - see above.
  • Statutory Paternity Pay, Shared Parental Pay, or Adoption Pay. There is no equivalent benefit if the employer does not or cannot pay. So self-employed people cannot qualify for these benefits through paying Class 2.
  • Holiday pay and other paid leave - maternity, paternity, parental - is purely a matter for an employer, so self-employed people do not get it.
  • Employer pension contributions. Self-employed people must pay all the contributions into a pension scheme if they have one. Auto-enrolment does not apply to them but they can pay into the state sponsored pension scheme called NEST as employers do.
  • Salary sacrifice enables employees to avoid NICs on their pension contributions and to get a bicycle or childcare free of tax and National Insurance. Self-employed people may be able to claim the cost of a bicycle as an allowable expense against their tax if they use it for work travel.
  • Other perks paid by an employer
Self-employed people can claim means-tested benefits on the same terms as anyone else. But when their income is assessed the calculation may assume they earn the statutory minimum or living wage even if their profits are lower than that. At the moment that applies only to Universal Credit and to Council Tax Support in some parts of England. 

For the week (8-15 March 2017) that the Government's policy was to raise the rate of Class 4 contributions from 9% it said it would also consider extending the benefits they are paid. It still might.

The value of Jobseeker's Allowance and Redundancy Payments is very small and on my calculations means that a fair rate for the main Class 4 rate for the benefits they get is 11.98% compared to the 12% paid by employed people.

  • All the rates and rules described in the blogpost relate to the tax year 2017/18.
  • This blogpost gives only a very brief guide to the benefits mentioned. It is for information only and you should not rely on it to make financial decisions. Find out more about benefits at www.gov.uk and search for the benefit you want.


Version 1.5
15 March 2017