National Insurance changes for self-employed
Depending on their profit, self-employed people pay two classes of National Insurance contribution – Class 2 and Class 4.
Class 2 contributions are flat-rate contributions of £3.15 per week for 2022-2023. This payment enables self-employed earners to build up entitlement to the state pension and some other contributory benefits.
Class 4 contributions are payable on profits in excess of the lower profits limit, but do not garner any pension or benefit entitlement.
Lower profits limit for Class 4
The lower profits limit for Class 4 contributions is aligned with the primary threshold for Class 1 National Insurance contributions. This was set at £190 per week for the period from 6 April 2022 to 5 July 2022 (equivalent to £9,880 per year), and rose to £242 per week from 6 July 2022 (equivalent to £12,570 per year and aligned with the personal allowance).
The annual primary threshold is £11,908. Consequently, the lower profits limit for Class 4 is set at £11,908 for 2022-2023.
Class 4 contributions are payable at the main rate, which is 10.25% for 2022-2023, on profits between the lower profits limit and the upper profits limit, which at £50,270 is aligned with the upper earnings limit for Class 1 contributions. Any profits above the upper profits limit attract Class 4 contributions at the additional rate, which is 3.25% for 2022-2023.
The higher starting point for Class 2
Historically, a liability to Class 2 contributions has risen where profits exceed the small profits threshold (for 2022-2023 it is set at £6,725). However, the starting point for Class 2 contributions will increase from 6 April 2022 to align it with the starting point for Class 4 contributions. For 2022-2023 this is set at £11,908.
As Class 2 contributions earn entitlement to the state pension, self-employed people who have profits between the small profit threshold (£6,725 for 2022-2023), and the new starting limit of £11,908 will be treated as if they had paid a Class 2 contribution. This means that they will get the benefit of having paid a Class 2 contribution, but for zero contribution cost.
This brings the self-employed with low profits broadly into line with employed earners with low earnings who are treated as having paid Class 1 contributions at a notional zero rate on earnings between the lower earnings limit (£6,396 for 2022-2023) and the primary threshold (£11,908 for 2022-2023).
Self-employed earners with profits below the small profits threshold can opt to pay Class 2 contributions voluntarily to maintain their contribution record. At £3.15 per week for 2022-2023, this is a much cheaper option than paying voluntary Class 3 contributions, which are set at £15.85 for 2022-2023.
In the future
The Class 4 rates were increased by 1.25 percentage points for 2022-2023 due to the introduction of the Health and Social Care Levy. The rates are due to revert to 9% (main rate) and 2% (additional rate) from 2023-2024.
The self-employed will also have to pay the Health and Social Care Levy of 1.25% on profits in excess of the lower profits limit from 2023-2024, so the total impact remains the same. However, unlike Class 4 contributions, liability to the Health and Social Care Levy remains beyond the state pension age.