Class 2 NIC is finally being abolished from 6 April 2019.
Class 2 NIC currently gives entitlement to State Pension, Maternity Allowance, Bereavement Benefits and the Employment & Support Allowance, these benefits will fall under Class 4 NIC with effect from 6 April 2019.
For 2018/19, Class 2 NIC is payable at £2.95pw or £153.40 pa. Class 2 NIC is payable where profits exceed the “Small Profit Threshold” of £6,205 but the legislation allows the self-employed with profits below this to pay Class 2 NIC voluntarily.
From 2019/20 it has been announced that Class 2 NIC will be abolished but that for those self-employed persons with profits that fall between a new Class 4 NIC Small Profits Limit (effectively the old Class 2 NIC small profit threshold) and the Class 4 NIC Lower Profits Limit will be deemed to have paid Class 4 NIC thereby giving the person a qualifying year for benefit entitlement purposes. The Small Profits Limit will be set at 52 weeks times the Class 1 NIC Lower Earnings Limit – currently £116pw or £6,032pa.
This will create an issue for clients with low profits who wish to protect their contribution years. Whilst previously they could voluntarily opt to pay Class 2 NIC once it has been abolished they will no longer be able to do so. There is the option of paying Class 3 NIC voluntarily but that is £14.65pw or £761.80pa almost 5 times the rate of Class 2 NIC.
Consideration should be given to whether deferring a capital allowances claim might smooth the profits over a few years so that the overall profit is the same but in each year it exceeds the new Class 4 NIC Small Profits Limit. As well as gaining extra protection it will also reduce the NIC payable.
Finally whilst none of us have a crystal ball, the reduction in number of contributory years to qualify for a full pension might mean the decision is taken to allow that year to become non qualifying.