Self-employed people who make profits of less than £6000 will still face a massive rise in their National Insurance contributions in 2018/19 despite the Chancellor's U-turn over National Insurance rises. They will pay more than £600 extra to ensure they get a full state pension.
People who earn less than the Small Profits Threshold - £6025 in 2017/18 - do not have to pay National Insurance Contributions at all. But if they choose to do so they can buy them for £148.20 a year. They might do that to fill a gap in their contribution record to make sure they have the 35 years needed to get a full New State Pension of £159.55 a week.
But from April 2018 the cost of these voluntary contributions will quintuple to around £750. That is because the contributions they can pay now - called Class 2 - are being abolished. So they will be left with no choice but to buy the much more expensive Class 3 contributions. They are £741 a year in 2017/18 and will rise by inflation to reach more than £750 from April 2018. So their bill for a year's National Insurance contributions will rise from £148.20 to £750 - a difference of more than £600.
The Government will not say how many choose to pay voluntary Class 2 contributions. But figures published in December 2016 indicate it is around 100,000.
They are not helped by the Chancellor's extraordinary U-turn a week after his Spring Budget to scrap his plans to raise the Class 4 contributions paid by more than three million self-employed to raise another £2 billion over the next four years. Those on very small profits do not pay National Insurance at all so would not have been affected by that rise.
The Chancellor announced his U-turn in a letter to Conservative MPs on the morning of Wednesday 15 March, almost exactly seven days after he made the proposals. He made it clear that he changed his mind so that "the tax lock...commitments we have made...should be honoured in full."
That tax lock was of course in the 2015 Conservative Manifesto which Philip Hammond and more than 300 of his colleagues were elected on. It said four times in almost identical terms that a Conservative government “will not raise VAT, National Insurance contributions or Income Tax”.
Although the law that implemented this tax lock only applied to the contributions paid by employee's and employers - called Class 1- the Chancellor's letter admitted that "it is clear that compliance with the 'legislative' test of the Manifesto commitment is not adequate."
But it seems the tax lock will not protect the million poorest self-employed who need to fill a gap in the NIC record. They face a £600 rise - at least 10% of their low profits.
Unless of course there is another U-turn.
15 March 2017
The Government response to the Consultation on abolishing Class 2 says
- "Analysis suggests that those expected to pay Class 3 NICs in any one year following the abolition of Class 2 would represent only 5% of those with profits below the SPL [now called the Small Profits Threshold] in 2018-19, and around 2% of all self-employed individuals who may have self-employment profits. This is based on HMRC forecasts showing that there will be over 5 million self-employed individuals who may be liable to NICs in 2018-19."
That implies 50,000 to 100,000 will be affected. However, researchers say that any estimates of self-employed by income band are "flaky". I am trying to get real figures from HMRC but so far a veil of secrecy has been drawn across them.