The news is full of details about HMRC’s plans to move the National Insurance contribution to January 31st after the tax year. What does this mean for self-employed individuals and freelancers? It means that you might soon have to bear financial hardships and pay your National Insurance contributions in a single lump sum.
As of now self-employed individuals are allowed to pay Class 2 National Insurance on a monthly or six-monthly basis, collected by direct debit. The flat-rate contributions of £2.70 a week entitle self-employed workers to receive certain state benefits, including the State Retirement Pension - Class 2 NICs are paid by any self-employed worker whose business makes more than £5,725 a year.
But under plans laid out in a consultation that closed a few weeks ago, the cash would be paid by 31st January after the tax year. This is the same deadline as self-assessment tax returns when the self-employed, depending on their profits, pay their income tax and Class 4 national insurance contributions, which are 9 percent of profits between £7,755 and £41,450. On top of this, Class 2 NICs would add £140.40 to this bill.
The payment date for the contributions will, if the change goes ahead, clash with your income tax self-assessment liabilities. Additionally, since extra cost would arise in January every year with no tax relief being given, your position under the new Universal Credit would also be adversely affected.
Alan McCappin, Practice Manager at Welling, Kent based Bradleys Accountants Limited says, “The administrative burden, of paying Class 2 NICs, coupled with the 9% NICs on profits and hefty payments on account can cause a strain to the taxpayer’s wallet under the self-assessment regime. I recommend self-employed individuals and freelancers reassess their income and decide whether a limited company would be suitable to their situation. With only a corporation tax rate of only 20% and its payment required in 9 months in arrears as opposed to making payments on account for the following tax year under self-assessment, the limited company can be quite an attractive solution to bring down the overall tax bill and cash outflow. Along with potentially saving you money in reduced tax bills, it will protect your personal assets if your business runs into financial difficulties.”