The Importance of
Class 2 NIC

Class 2 NIC arise where a self-employed individual has income chargeable to tax as trading income

What are Class 2 National Insurance Contributions? 

Class 2 National Insurance Contributions are paid by self employed individuals, typically during the Tax Return process. Paying Class 2 NIC is a legal requirement and also protects an individual's future entitlement to State Pension. Paying Class 2 NIC does not become mandatory until an individual reaches the small profits threshold (currently £6,515 in 21/22). 

 

My self-employed profits are less than £6,515, do I need to read on? 

Yes, if you are self employed HMRC should be aware of this, the ability to pay voluntary Class 2 NIC should be available when completing your tax return online. Regardless of the amount of profits your business makes, Glass Accountants would advise paying voluntary Class 2 NIC unless you are making NIC contributions through other means. For example NIC deductions through PAYE. 

Why is it important to pay Class 2 NIC? 

 

Paying Class 2 NIC entitles the individual to the Basic State Pension, Bereavement Benefits, Maternity Allowance and contributory Employment and Support Allowance. In this article we will focus on Basic State Pension.

 

Basic State Pension & Qualifying Years 

 

The New Full Basic State Pension entitles you to £179.60 per week. This works out at £9,339.20  per annum, not something you want to miss out on. Typically, you will require at least 10 qualifying years on your National Insurance Record to get any State Pension. To get the Full New Basic State Pension you require 35 qualifying years contributions. If your contributions fall between these parameters you will receive a proportion of New Basic State Pension. 

 

I have been filing Self Employment pages on my tax return for the last 16 years so HMRC will know I need to pay Class 2 NIC, right? 

 

Unfortunately this is wrong, HMRC’s current IT system means that even if Self Employment pages are prepared they will not:

  • Automatically register you for self employment

  • Contact you and request you pay Class 2 NIC 

This is the case even if your profits are over the small profits threshold mentioned above. 

 

What impact could this have on me? 

Upon retirement, if you have less than 10 qualifying years you may receive no State Pension at all. HMRC may allow you to make voluntary contributions for historic years but this could become increasingly costly the further back you go. 

 

How do I check my Qualifying Years? 

You can check your National Insurance record here or by calling HMRC on 0300 200 3500. 

 

I have realised I haven’t paid any Class 2 NIC, how do I rectify this? 

 

Glass Accountants would advise contacting HMRC directly about this on 0300 200 3500. They will be able to register you over the phone and backdate you as well. You will only be able to backdate your Class 2 NIC payments for a maximum of 6 years. You can sometimes pay gaps prior to the 6 years depending on your age. If HMRC offers to backdate further you will do this by paying Class 3 NIC. Class 3 NIC is costly and could mean payments of around £800 per annum. You can see how paying Class 3 NIC could become almost impossible for many individuals looking to increase their qualifying years. 

 

It’s not all doom and gloom. 

 

We hope that this article has not been relevant to you. But in the instance that it has, please keep positive and remember that you have spotted the mistake now. It could have been a lot worse if left. As always if you have any questions please do not hesitate to contact one of our team who would be happy to advise you further.

Glass Accountants were always very attentive, approachable, and easy to get in touch with. Their regular communication throughout was reassuring.

Thomas Howard,Toms' Antiques