NIC for self-employed to rise – #Budget2017

Changes aim to align national insurance contributions and income tax.

One of the significant features of the Budget is the changes for the self-employed. The nod to national assurance alignment and increases in national insurance contributions (NIC) will be significant for entrepreneurs.

Current system
The self-employed pay class 4 national insurance at 9% between the lower profits limit (£8,060 in 2016-17) and the upper profits limit (£43,000 in 2016-17).

Currently, the self-employed also pay class 2 NICs at a flat rate of £2.80 per week (or £145.60 a year), although this is due to be abolished from April 2018.

New system
In the 2016 Budget it was announced that class 2 NICs would be abolished from April 2018. These determine entitlement to benefits for the self-employed. From April 2018, class 4 will become the replacement for determining entitlement to benefits.

The main rate of class 4 NICs will increase (from the current rate of 9%) to 10% from April 2018 and to 11% from April 2019.

This is how it will work:

Example 1
Assume lower profits limit for 2019/20 will be £8,582.
Assume personal allowance for 2019/20 will be £12,070.
Mr A is self-employed with profits of £17,500.
Class 4 NICs will be: [profits less (lower profits limit)] x 11%
This is (£17,500 – £8,582) x 11% = £980.98
Income tax will be: [profits less (personal allowance)] x 20%
This is (£17,500 – £12,070) x 20% = £1,086
Total tax and class 4 NIC will be £2,066.98

Before these changes (in 2015/16), Mr A, with profits of £17,500, would pay income tax of £1,380 [(£17,500 – £10,600) x 20%], class 2 NICs of £146 and class 4 NICs of £850 [(£17,500 – £8,060) x 9%], making a total of £2,376.

Example 2
Lower profits limit for 2019/20 will be £8,582.
Mrs B is self-employed with profits of £25,000.
Class 4 NICs will be: [profits less (lower profits limit)] x 11%
This is (£25,000 – £8,582) x 11% = £1,805.98
Income tax will be: [profits less (personal allowance)] x 20%
This is (£25,000 – £12,070) x 20% = £2,586
Total tax and class 4 NIC will be £4,391.98

Before these changes (in 2015-16), Mrs B, with profits of £25,000, would pay income tax of £2,880 [(£25,000 – £10,600) x 20%], class 2 NICs of £146 and class 4 NICs of £1,524 [(£25,000 – £8,060) x 9%], making a total of £4,550.