**UPDATE 15 March 2017 – The Chancellor has dropped the following plans to increase National Insurance from April 2018 **
Most self-employed individuals (sole-traders and partnerships) pay Class 4 National Insurance at a rate of 9% on profits in excess of the £8,060 earnings threshold, reducing to 2% on any profits over £43,000 (2016/17 tax year).
What is changing?
The Chancellor announced today that the main rate of Class 4 NIC (9%) will increase by 1% (to 10%) from April 2018, with a further 1% increase (to 11%) from April 2019. There has been no mention of any changes proposed to the 2% Class 4 NIC rate for profits in excess of £43,000 (2016/17).
Let’s take a look at a sole-trader who normally makes a profit of £25,000 from their self-employment activities. Currently, the individual would pay £1,524.60 in Class 4 NICs (calculated [£25,000 – £8,060] x 9%). This is, of course, in addition to the income tax payable (approximately £2,800 – but will depend on other tax factors specific to the individual).
How will the change affect me?
Following on with the example above, and assuming that the NIC thresholds remain constant (although this is rarely the case), from April 2018 the self-employed business owner earning £25,000 will pay an additional £169.40 in Class 4 NICs for the year. From April 2019, a further £169.40 in Class 4 NICs will be added to the April 2018 increase.
Previously, in December 2016, however, the UK Government announced that it was abolishing Class 2 National Insurance (the flat rate NIC paid by self-employed individuals earning over £5,965 per year – 2016/17 tax year) from April 2018. This will result in a reduction of £145.60 per year in Class 2 NICs payable by the self-employed.
Had the Government announced the increases in the rate of Class 4 NICs at the same time as it announced the abolition of Class 2 NICs then, psychologically, the net effect of the overall increase in NICs for the self-employed would perhaps have made less of an impact. As it stands however, the average self-employed worker will pay an additional 2% in NICs from April 2019 than they were expecting to yesterday.
How e-ccountant can help
We help our clients by ensuring that we regularly review their profit extraction mix in order to provide advice on the most tax efficient method of drawing out business funds to their personal bank account. If you require our assistance please call us today on 0203 3226630 or email us.