Class 2 National Insurance

Class 2 National Insurance – the voluntary NI contribution

One of the questions we often get asked when clients look at their tax return after a shift in their self employed income is about the NI contributions.

When you’re self-employed you pay two types of NI as well as income tax on your self assessment tax return. The rates and thresholds for the 2019/2020 tax year were:

Class 2  - on profits at £6,365 and above – at £3 per weekMoney decisions

Class 4 – on profits at £8,633 and above – at 9% up to £50,000 and then 2%

If your profits are below £6,365, should you still pay Class 2 if you don’t have to? You can still choose to pay it if you want to and not take advantage of the small earnings exemption.

For a lot of self employed people this will be the only NI they pay and the only way to make up the qualifying years for their state pension.

You need 10 qualifying years to get something and 35 qualifying years to get the new full state pension. In which case missing a year or two shouldn’t make that much difference.

However, what if for example you had 12 years until you reach state pension age but only 29 qualifying years already, leaving 6 more needed? 

The rate of Class 2 NI for 2019/2020 was £3 per week.

Each qualifying year will gain you an extra £5 per week in pension payments. If you pay £156 on your 2019/2020 tax return you will gain an extra £260 entitlement per year in state pension.

When preparing a client’s tax return it’s one of the things we specifically look at.

We can’t make this decision for our clients, all we can do is point out the facts. We would ask them to get a pension forecast to see what their position is and take financial advice.

This is just a brief overview of how Class 2 NI can affect your state pension.  As with anything tax and National Insurance related, there is a lot more detail to be considered as well as the tax payers individual circumstances. We would recommend taking advice before deciding whether to pay the Class 2 National Insurance voluntarily.