The measure

The government has announced it will increase the main rate of Class 4 National insurance contributions by 1% to 10% from 6 April 2018, and by a further 1% to 11% from 6 April 2019.

As previously announced at Budget 2016, Class 2 NICs will be abolished from April 2018.

Self-employed individuals will be able to access and determine entitlement to contributory social security benefits through payment of Class 4 NICs alone from April 2018.

Who will be affected?

This measure will affect self-employed individuals who currently pay both Class 2 and 4 NICs.

When?

This measure will be implemented from 6 April 2018.

Our view

Previously announced, the abolition of Class 2 NICs would, on its own, increase the differential between the amount of NICs paid by employees and those paid by the self-employed.

Historically, the differences in rates of contributions reflected the fact that the self-employed received less support than employees from the state in the form of contributory welfare benefits and statutory payments, particularly the State Pension. Over time this gap has reduced and although there is still not complete alignment, this is mainly limited to certain parental benefits.

Since April 2016, the self-employed have had access to the same State Pension as employees which is worth up to £1,800 a year more to a self-employed individual than under the previous system. The increases in the Class 4 rate reflects this more equal State Pension entitlement.

Taken together with the abolition of Class 2 NICs, this means that only self-employed individuals with annual profits above £16,250 in 2019/20 will pay more NICs as a result of the changes. In combination with the increases in the income tax personal allowance, only those self-employed individuals with profits of more than £32,900 in 2019/20 would pay more in income tax and NICs than in 2015/16.

Based on the 2017/18 Lower and Upper Profits Limits, the incremental NIC cost of this measure to a self-employed individual earning £45,000 or more per annum will be approximately £1 per day (c. £370 per annum) for each 1% increase in the main rate.

Self-employed contractors may look to pass on any additional NIC costs from April 2018 through increases in their charges.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.