Class 2 NI contributions – what has changed?

In his 2023 Autumn Statement, Jeremy Hunt announced that Class 2 NI contributions would be scrapped for self-employed people.

While this is welcome news for the self-employed, the reality is more complex. In fact, in certain circumstances, Class 2 NI will continue to exist. In this post, we take a close look at the changes to National Insurance and what they mean for you.

What are Class 2 NI contributions?

Self-employed people generally pay £3.45 per week in Class 2 NI contributions. They count towards your state pension and various benefits. The latter include the contribution-based Employment and Support Allowance, the Maternity Allowance and the Bereavement Support Payment.

The changes explained

The National Insurance changes ultimately depend on your income.

If you make a profit of over £12,570, you will no longer have to pay Class 2 NI from the financial year 2024/25. This effectively gives you a saving of £192.40 per year. The year will also count as a ‘qualifying year’ for state pension purposes. In other words, it counts as one of the 35 years of NI contributions needed for the full state pension.

However, you face a different situation if your profits are lower. If you make a profit between £6,725 and £12,570 nothing will change. People with profits between these amounts are currently ‘deemed’ to have paid Class 2 NI without actually having to pay it.

Things are different still for people who make profits under £6,725 per year. If you are in this position, you won’t be ‘deemed’ to have paid Class 2 NI. So to get a qualifying year for state pension purposes, you’ll have to voluntarily pay Class 2 NIs.

What about Class 3 NIs?

While it seems unfair that self-employed people on the lowest incomes will still have to pay Class 2 NI, it’s actually helpful. If Class 2 NIs were completely withdrawn, the alternative would be for those on low incomes to voluntarily pay Class 3 NIs. These are currently set at £17.45 per week – a much higher rate than £3.45!

For clarity, Class 3 NIs will continue. These are available to people who have gaps in their NI payment record. These are normally paid voluntarily by people who are not working. You can find out more by downloading this application form for paying Class 3 NI.

A reminder about pensions

While Class 2 contributions will be scrapped for most people, there’s one last important thing to remember. If you have gaps in your NI payment history, you have until 5th April 2025 to ‘buy back’ any missing years going back to 2006.

After that date, you’ll only be able to buy back years missed during the last six years. It costs £824 to buy a ‘missed’ year, but it can add £275 to your annual pension. In other words, it can pay for itself in three years.

Need advice on NI?

If you’d like any advice on National Insurance contributions, please do get in touch. Our accountants can advise you on what NI you should be paying, as well as whether it makes sense for you to buy back missed years of contributions.