The last fortnight has been an interesting one in financial terms. First, the release of the Budget which, amongst other measures, included an increase in the rate of Class 4 National Insurance Contributions, the rate applicable to certain of the self-employed.
After a lot of vocal opposition to the increase in Class 4 NIC, there followed a U-turn by the Chancellor, who said that there would be “no increases to [NIC] rates in this Parliament”.
Ignoring the political impact of this, there is an interesting challenge here for the Treasury.
Class 2 NICs – the fixed-rate contribution paid by the self-employed – will still be scrapped from April 2018. Currently, it is the payment of Class 2 NICs which entitles the self-employed to benefits such as Employment and Support Allowance, Maternity Allowance and most importantly Retirement Pension.
It is envisaged that these benefits will now come via payment of Class 3 and 4 NICs.
The Treasury will of course have to consider how to fund these benefits when, at least for the time between the abolition of Class 2 and the almost inevitable rise in Class 4, there will be a shortfall.
There is also an issue for those living and working abroad – who currently may pay Class 2 NICs on a voluntary basis to keep UK benefits. Class 2 is a flat-rate contribution of £2.85 per week in 2017/18. It is envisaged that they will now pay Class 3 contributions – which stand at £14.25 per week in 2017/18, 5 times the rate currently being paid by those making voluntary contributions. We can expect this rate to rise slightly by 2018/19.
We have not yet seen the legislation that will enact all these changes, so specifics are not clear yet, however the government’s plan is fairly clear. Nevertheless, as the last two weeks have shown, governments’ plans may be subject to change.