National insurance for the self-employed after the Spring Statement - what the changes mean for you and your clients
The Spring Statement brought National Insurance changes for the self-employed. What will this mean in practice and what should businesses and advisers watch out for?
The key change is that from 6 April 2022 (the 2022/23 tax year onwards), self-employed traders and partners in trading partnerships will receive National Insurance credits where profits are between the Small Profits Threshold (SPT) and the Lower Profits Limit (LPL) for Class 4 National Insurance.
This was covered in the HMRC announcement on 23 March 2022 - Reduction in Class 2 liability of those earning between the Small Profits Threshold and Lower Profits Limit.
The SPT and LPL were also increased. They rise from £6,515 (2021/22) to £6,725 (2022/23) for SPT, and from £9,568 (2021/22) to £11,908 (2022/23) for LPL. From 2023/24, the LPL is due to match the personal allowance for income tax threshold, at £12,570.
Note that the LPL for 2022/23 is a composite of 13 weeks at the ‘old’ rate and 39 weeks at the ‘new’ rate (equivalent to the income tax personal allowance).
Watch out for cases on the margins. Though the term ‘self-employed’ is often used with regard to National Insurance, the liability to Class 2 National Insurance doesn’t follow the same rules as income tax.
Liability to Class 2 National Insurance is based on being ‘gainfully employed’, otherwise than as an employee, and covers those aged between 16 and state pension age. HMRC National Insurance Manual NIM20150 has references to the legislation (NIM20150 - Class 2 National Insurance contributions liability: Persons treated as self-employed).
What does this mean in practice?
The increase in thresholds will bring a reduction in liability, which will off-set the increase in the Class 4 National Insurance rate for 2022/23 by 1.25% to 10.25% (9% 2021/22) in respect of the Health and Social Care Levy.
But the changes will have a more wide-reaching impact on businesses which have made losses, or have profits of less than the SPT or LPL.
The change affects sole traders and partners.
Trading profits between SPT and LPL
For 2021/22, individuals with trading income between SPT and LPL were liable to pay Class 2 National Insurance. This would usually be paid in a lump sum along with the 31 January income tax payment.
From 2022/23 onwards, individuals with trading income between SPT and LPL will not be liable to pay Class 2 National Insurance, but, like employees with earnings between the Lower Earnings Limit and the Primary Threshold, they will receive credit for Class 2 and entitlement to benefits and state pension, as if they had actually paid.
On reaching LPL, liability to both Class 4 and Class 2 will kick in, so creating something of a cliff edge.
Trading profits below SPT and trading losses
Individuals with trading losses, or trading profits below SPT will face the same choice as in 2021/22 of making voluntary Class 2 contributions.
In is worth noting here that:
*voluntary Class 2 contributions are cheaper and give access to better benefit entitlements than Class 3 voluntary contributions.
*trading losses are treated as nil profits for these purposes, so those with losses can still pay Class 2 voluntarily.
*time limits need to be met: Class 2 should be paid at the latest by 31 January following the end of the tax year. Missing this deadline brings complications and potentially missed entitlement (Agent Update 73, September 2019).
An overview of the position can be found in the HMRC National Insurance Manual at NIM23500 (NIM23500 - Class 2 National Insurance contributions: Entitlement to pay voluntarily).
A final caution
With many businesses, quite exceptionally, making losses during the pandemic, remember that the treatment of losses for income tax and National Insurance is different. In particular, where income tax relief for losses is claimed against non-trading income, trading losses carried forward for Class 4 National Insurance and income tax purposes will differ.
There is a useful summary in the HMRC manuals at NIM24610 - Class 4 NICs: computation of liability: losses.
While the National Insurance changes in the Spring Statement are welcome news for businesses, advisers will need to watch the detail to ensure clients obtain the maximum benefit.