ANNEX A: Change to the structure of Class 2 contributions and the Small Earnings Exception
18.The Act will change the structure of Class 2 contributions from the existing liability that arises in respect of each week, or partial week, of self-employment to an annual liability which is triggered by reference to a self-employed earner’s Class 4 NICs profits (rather than earnings) and which is then calculated by reference to the number of weeks, or part weeks, of self-employment in the tax year.
19.The Class 2 contributions liability will arise at the end of the tax year and the amount due will be assessed on an annual basis, with reporting and collection through the SA process. The self-employed will, as now, be required to file their SA return by the 31 October following the end of the tax year if submitted on paper, or by the 31 January following the end of the tax year if submitted online.
20.The payment of Class 2 contributions will be due no later than 31 January following the relevant year.
21.Penalties and appeals will be more closely aligned with those for SA so that the self-employed are not subject to two different regimes.
22.The current SEE arrangements will no longer be necessary. Liability for Class 2 contributions will be determined by whether the self-employed earner’s Class 4 NICs profits (rather than earnings), declared at year end, exceed a set threshold – the SPT. The SPT has been determined by uprating the Class 2 contributions SEE level for 2014-2015 by reference to the consumer prices index and will in future be uprated annually along with other NICs thresholds and limits. Those with either low profits (or even losses) or no profits, who will no longer be liable for Class 2 contributions under the new arrangements, will be able to opt to pay Class 2 contributions voluntarily so that they may protect their benefit rights.
23.The Class 2 contributions bi-annual bill and Direct Debit arrangements (monthly & six monthly) will end for the majority of self-employed earners. These customers will instead receive a payment request (either via paper or electronically) once they have filed their SA return at the end of the tax year.
24.Most self-employed earners will be able to choose to make in-year payments to budget for any annual Class 2 contributions liability (or to pay voluntary Class 2 contributions if their profits fall below the threshold). This is to avoid those with low profits facing a large end of year bill, something which was raised in a number of responses to the consultation on collecting Class 2 contributions through SA.
25.Those who are self-employed for Class 2 contributions purposes, but not for tax and Class 4 NICs purposes and who therefore do not have any Class 4 NICs profits for the purposes of establishing liability (for example, those running a property or investment business), will still be entitled to pay Class 2 contributions voluntarily. A separate process will be retained to allow these self-employed earners and the special groups mentioned above (other than Share Fishermen who can pay through SA) to continue to pay Class 2 contributions under the new arrangements.
26.Self-employed women wishing to claim MA may be impacted by the change given the contemporaneous nature of the qualifying condition that currently determines the weekly rate of MA payments to the payments of Class 2 contributions. Women who have not had the opportunity to file an SA return and pay Class 2 NICs will be able to pay Class 2 contributions early in order to secure MA entitlement at the standard weekly rate. This payment option will apply whether or not the woman ultimately becomes liable to pay Class 2 contributions. Self-employed women who choose not to make an early payment of Class 2 will receive the lower rate of MA, unless they have an SA record which demonstrates that they have made the requisite number of Class 2 contributions.
27.Women who are neither employed nor self-employed but who participate in the business of their spouse or civil partner can receive the lower rate of MA for 14 weeks if their spouse or civil partner has paid Class 2 contributions for 26 weeks, voluntarily or as evidenced by their SA return. Those spouses or civil partners who have not had the opportunity to file an SA return and pay Class 2 contributions will also be able to pay Class 2 contributions early.