Class 2 National Insurance for the self-employed Issues
I would like to have a quick chat to you about Class 2 National Insurance for the self-employed, and the problems you may or may not know you are having.
If you were a person that worked for what my father would call a normal company and you are an employee, then you would have Class 1 National Insurance taken from your pay slip each month, and that goes towards lots of state benefits and also your state pension by the time you get old and wrinkly, assuming there is still going to be a state pension.
But for the self-employed, you have an option to pay Class 2 National Insurance. I say option, its actually mandatory if your profit is over a certain threshold. It doesn’t give many state benefits, but it does keep your contributions going to the state pension.
That’s whoop-de-doop.
However, I think it was back in 2016 – 2017 tax year, HMRC decided to put the Class 2 contributions into your yearly tax return. They used to take it monthly, quarterly, half yearly, but then they decided, nope, we’re going to stop that. We’re going to put it into your yearly tax return.
But what we’ve noticed now is sometimes when we do clients’ tax returns, there isn’t the option to pay Class 2 National Insurance. It comes up with zero on it. We’ve always been told, Oh, it was because the person didn’t set up as self-employed correctly.
Well, rubbish.
In my Accounting Practice, we use the HMRC tools to file people’s tax returns, so we’re doing it directly onto the HMRC system. We shouldn’t have that issue. But what we found is that when they transitioned away from the monthly, quarterly, half yearly process of paying Class 2, they didn’t really transfer all the records. It might be a case of you are set up on the National Insurance system, but it hasn’t been integrated with the self-assessment system.
That’s a bit of a problem because it looks like then you are not paying any Class 2, unless HMRC go through and review the tax returns, that’ll be absolutely correct. They won’t charge you Class 2.
Now, a lot of the time they will go through and say, you should have paid it, & then change your tax return to include the Class 2 amount.
There are times that your self-employment profit does not reach the threshold, but you can’t press the button to say, “I want to pay Class 2 voluntarily” and keep your National Insurance record going. That is the problem you are facing.
You’ll have to phone HMRC, the National Insurance line, and get them to try and fix your records so it does integrate with the self-assessment tax return. Wait a few days/weeks, then you need to delete everything in the tax return, and start all over again and hope that they have correctly linked the two up.
It’s a bit of a pain in the bottom and a lot of people can see that it’s not there and we warn them it’s not there, but they don’t do anything about it. What you can do, you can go and backfill a certain number of years, I think you go back six or four years, and you can backfill missing contributions. That’s all very well, but you’ll probably be charged the £15 a week Class 3 voluntary contribution.
If you want a state pension, if there’s going to be one, I would advise that you actually look at it and then phone up the National Insurance helpline. I don’t know what happens for people that use accountants with commercial software. What happens to that contribution if your self-assessment and your National Insurance record aren’t linked? I don’t know. We only found this out because we use the HMRC systems.
What do you need to do to get a state pension? You must have a minimum of 10 full years contributions to the National Insurance system. The maximum in theory you have to pay is 35 years. But some people at my age, you can tell by the grey hair, we might have opted out of some of the state pension contributions in the late 1990s, and so we’re now having to contribute more years in order to make sure we get the full state pension. I think I’ve got to contribute up to 39 or 40 years instead of the 35, but hey ho, I’m still working, so that’s fine. So, a minimum of 10 years, maximum in theory of 35 years, and then you should be able to get the full state pension when you retire.
Always have a look at your HMRC calculation and see whether it says it’s zero or not, or unable to extract. If that is there, then there’s a problem. It can take about three weeks to link the
national insurance database to the self-assessment tax return database once you contact the NI Helpline (0300 200 3500). Don’t expect it to go through quickly.
There is a post on my knowledge base on how to check how many years National Insurance you’ve got – https://www.performanceaccountancy.co.uk/knowledgebase/how-to-view-ni-contributions/ .
Go have a look at that, see what years are not full, and you might want to consider trying to backfill them. It should give you a calculation to show how much you'd have to pay. But the cheapest thing is pay it at the time, and if you can’t pay it at the time because it’s not coming up in the tax return, complain to the National Insurance line for HMRC.
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The information contained in this document is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is provided or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.
Louise Herrington, Herrington Accounting Services t/as Performance Accountancy disclaims all liability and responsibility arising from any reliance placed on any of the contents of this article.
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