A self-employed maths tutor who earns around £2,500 a year, faces a 400% increase in her national insurance contributions (NICs) if she wants to retain her right to a state pension.
This is an extra £588 a year, which is a large sum of earnings. Potentially, several hundred thousand self-employed people who are currently earning below £6,000 a year will be hit, unless the government changes this between now and April next year to reduce the impact on self-employed.
The government is pressing ahead with the previously announced abolition of “class 2” NICs for the self-employed from April 2018. As things stand, this means many of Britain’s lowest-earning self-employed workers will either have to pay an extra £588 a year, or lose their entitlement to a state pension.
Tutors are just one example of the vast majority of people who will be hit by the little-known change.
The tutor Clark is in her 50s and lives in the West Country, and while her earnings are relatively small, she and her husband are not solely reliant on her income as he receives a pension.
Class 2 NI is payable at the rate of £2.80 per week for the self-employed who earned more than £5,965 in 2016-17. Crucially, though, those who earn less than that can choose to pay class 2 NI contributions in order to gain entitlement to a state pension. This is what Clark does and voluntarily pays £145.60 a year. But from April 2018 she won’t be able to do that as she will have to either pay class 3 voluntary contributions, at a cost of £733.20 a year at current rates, or “give up on a state pension”. That’s a 404% increase.
This change only affects self-employed people whose earnings are below what’s known as the “small profits threshold” (SPT), currently £5,965. However, there are more people in that bracket than you might think.
A few days ago the office of national statistics revealed that in 2015-16 there were 967,000 people with an annual income from self-employment of less than £5,965.
If you are not eligible for NI credits, and want to protect your future entitlement to the state pension, you would need to pay voluntary class 3 contributions, says the government. The current rate is £14.10 a week or £733.20 a year.