Will scrapping Class 2 National Insurance be enough to win the self-employed vote?

By Andy Chamberlain, Director of Policy at IPSE - the Association of Independent Professionals and the Self-Employed

At the Autumn Statement two weeks ago, the Chancellor announced Class 2 national insurance contributions (NICs) would be scrapped. It’s a welcome simplification, and for some it will be a tax cut too. But if the government really wanted to cut taxes for the self-employed there are alternative measures that would be more effective, especially for those on the very lowest incomes.

Scrapping Class 2 will not impact very low earners

Scrapping Class 2 NICs isn’t a new idea. Former Chancellor George Osborne first announced the plans in 2016, saying that abolishing Class 2 NICs would benefit self-employed workers and would see the end of an ‘outdated levy’. Two years later, his successor, Philip Hammond, reversed the plans stating that in fact scrapping Class 2 would hit the lowest earning self-employed and actually increase complexity. This is because those who earnt under the NI threshold, but who wished to keep their entitlement to benefits such as the state pension, would have had to pay the more expensive Class 3 NICs.

So what has changed this time? Well nothing actually, except Class 2 won’t be fully scrapped. It remains in place as a voluntary tax so that those under the current ‘small profits threshold’ of £6,725 can continue to pay it, if they choose to. For these tax payers, the measure brings about neither a saving, nor a simplification – things will be as they were.  

Low earners also unaffected

Those with profits above the small profits threshold but lower than the ‘lower profits limit’ of £12,570 already don’t have to pay Class 2 but they are credited anyway so their entitlement to state pension is unaffected. For this group, scrapping Class 2 also won’t make any difference, so again no simplification and no tax saving here – just more status quo.

Those with profits over £12,570 will see the benefit of both the simplification and the tax saving. The tax saving (£192 a year) will be proportionally greater for those earning closer to the lower profits limit, which is what the government means when it says this measure will benefit low earners; it’s just that it has neglected to say it doesn’t benefit the very, very lowest earners. It also benefits higher earners, but as a percentage of total income it diminishes as the income increases.

A welcome simplification

Here is probably a good point to pause and reflect on just how complicated Class 2 NICs has become. It’s a relatively small amount of tax for most self-employed workers, who generally pay much more Class 4 NICs which is calculated as a percentage of profits – more in line with pretty much every other tax out there. Despite its small stature, there are thresholds; there are those who must pay it voluntarily and there are almost certainly fewer and fewer people who understand why it exists in the first place.

Getting rid of Class 2 is therefore an attractive simplification overall and we at IPSE support it. If the government can work out a way to decouple state pension entitlement from Class 2 for the very lowest earners, it can fully remove it from the statute book, which is surely the ultimate goal.

The trading allowance

But there are other ways the government might deliver a more meaningful saving to tax payers. Much has been made of the Chancellor’s decision not to raise tax thresholds, despite inflation pushing more taxpayers into higher bands, and the same can be said for the self-employed. The trading allowance entitles the self-employed to earn £1000 without attracting tax or even having to register with HMRC. If the individual concerned has other income (e.g. from an employment) it’s a good tax saving, but even better it’s a great simplification – the tax payer must do precisely nothing.

We believe the trading allowance should be raised (we have previously suggested £5000) so that this saving and simplification can impact a much greater pool of casual businesses.

The VAT threshold

Those with more established businesses are unlikely to be impacted by the trading allowance at all, but many run into the VAT threshold (currently £85,000) and then desperately reduce their turnover in order to deliberately stay under it. This is a clear and obvious barrier to growth – both for the individual businesses and for the whole economy. The Chancellor should have raised the threshold, particularly given recent high inflation, which would create some head room for businesses to grow without having to charge VAT.

It may be the case that the Chancellor is holding back threshold raising measures until the Spring Budget, when the impending general election will be more front of mind for voters. While most self-employed taxpayers will welcome the scrapping of Class 2 and the cut to Class 4, they will also be all too aware that overall, the tax burden is greater than it has ever been, even with the latest announcements. If the Chancellor really wants to win over the self-employed at the ballot box, he will have to do more next year – we at IPSE will certainly be pushing for it.