Prior to the March Spring Statement, most self-employed individuals were facing increased national insurance contribution (NIC) bills this year. However, those with profits up to and just over £28,000 will now see a fall in the amount they pay compared to last year. What’s more, low earners can benefit from deemed contributions.
Class 4 NICs
The introduction of the 1.25% health and social care levy from 6 April put up the rates of profit-related class 4 NICs to 10.25% and 3.25%. However, the rate increase has been mitigated by a substantial uplift to the starting threshold. It was going to be set at £9,880 but will now be £11,908 across the 2022/23 tax year. For 2023/24, the threshold will be fully aligned with the income tax personal allowance of £12,570.
Although the freezing of the upper threshold at £50,270 is pushing more people into higher rate income tax, it is actually beneficial for NIC purposes. Extra profits are subject to NICs at 3.25% instead of 10.25%.
Class 2 NICs
The threshold at which fixed-rate class 2 NICs become payable was due to increase from £6,515 to £6,725. However, this threshold has also now been set at £11,908, and will be aligned with the personal allowance for 2023/24.
The £6,725 threshold has not, however, been discarded. In a big change for class 2 NICs, self-employed people with profits between £6,725 and £11,908 for 2022/23 are deemed to have made contributions without actually having to pay them. They will therefore continue to build up their contribution record. This is particularly important for State pension purposes where 35 qualifying years are required to obtain the maximum.
The deemed contribution threshold might mean a useful tax planning opportunity. For example, if profits for 2022/23 are set to be £12,000, spending £200 on, say, a new telephone before the year end will avoid the cost of class 2 NICs, and also save some income tax and class 4 NICs.
The table shows the overall impact of the Spring Statement changes at different profit levels:
|Profit||2021/22||2022/23 (Original)||2022/23 (Now)|
The Spring Statement factsheet explaining the changes can be found here.