Self employed individuals pay Class 2 National Insurance Contributions (NICs) at a flat weekly rate (currently £2.40), irrespective of profits, and Class 4 NICs on business profits in excess of £5,715.
Class 4 NICs are generally perceived as tax under another name, as they are payable along with income tax in January and July each year under the Self Assessment regime.
From April 2011, Class 2 NICs will also be payable in January and July, along with the Self Assessment payments. Some may say that this is yet another step in the blurring of the lines between NICs and income tax.
There is, however, one crucial difference between Class 2 NICs and Class 4 NICs, as the former determine entitlement to certain State benefits, including the Basic State Pension, Incapacity Benefit and Contribution-based Employment and Support Allowance.
All self employed individuals are required to register to pay Class 2 NICs, although it is possible to claim exception from paying if your self employed business profits are less than £5,075 (in the current tax year).
However, as failure to pay could impact on your benefit entitlements they may be worth paying even if you think you qualify for the exception – but only if you are not paying Class 1 NICs as an employee (as these also provide entitlement to benefits).
Those who are currently registered for Class 2 NICs should shortly receive further information from HMRC regarding the change to payment dates.
Remember – if you fail to register for Class 2 NICs by the 31 January following the tax year in which you become self employed you may be charged a penalty as well as having a reduced entitlement to benefits.