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Chancellor George Osborne has revealed that Class 2 National Insurance Contributions, which are paid by those who are self employed, will be abolished during the next parliament.

The announcement was made as part of the delivery of the 2015 Budget.

The Class 2 NICs are paid by self-employed people who take in more than £5,885 in profits a year. The amount is paid as a flat rate amount each week of £2.75, which can be collected monthly or weekly.

However, from 1st April 2015, the amount is no longer collected in this way and is assessed when your self-assessment tax returns are completed, so you will pay the contributions along with your tax bill. If you earn below the threshold of £5,885, you can apply to be exempt from Class 2 NICs, but some decide to make voluntary payments. This entitles them to certain state benefits. If you apply for exemption and it is approved by HMRC, you will receive a Certificate of Small Earnings Exception.

From April 2015, changes to Class 4 NIC will be introduced. Currently, only self-employed people who have profits above £7,956 are required to pay Class 4 NICs. However, the Chancellor has announced that a consultation on the changes will take place later in the year. Although the plans have initially been welcomed by many, there are concerns that the abolishment of Class 2 NIC could affect entitlement to some state benefits in the future.

The technical director of the Low Incomes Tax Reform Group (LITRG), Robin Williamson, said that although the simplification of the tax will be welcomed by many who are self employed, it is crucial that entitlement to benefits isn’t affected by the move. There are very few details of the proposed new system, but it appears that a test for contributory benefit will be included in Class 4 NICs.

Why pay Class 2 NIC?

Some people volunteer to pay their contributions of Class 2 NIC so that they will be entitled to the basic state pension, some bereavement benefits, maternity allowance and employment and support allowance, which is contribution based.

What will I pay during 2015-16?

Class 2 NIC will be paid on profits above £5,965 at £2.80 a week. Class 4 NIC will be paid on profits above £8,060 but below £42,385, at a rate of nine per cent. Any profits above £42,385 will be charged at two per cent.

As the proposed changes are still a little unclear, contact us if you would like any more information here at The Accountancy Partnership.

About The Author

Karl Bilby

We work very closely with our expert accountants to bring you the latest factually correct tax and accounting news. We also enjoy writing about small business news that we hope you find useful!

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