If you've completed your tax return and were given the option to pay Class 2 National Insurance Contributions (NICs) voluntarily because your profits were below £6,725 (the small profits threshold), you may be wondering if you should make this payment. Let’s break down how Class 2 NICs work, how they impact your National Insurance record, and what you should consider when deciding whether to pay voluntarily.

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What are Class 2 NICs?

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Until 5 April 2024, Class 2 NICs were a flat-rate payment made by self-employed individuals to ensure eligibility for certain state benefits, including:

• Basic state pension

• New state pension

• Contribution-based Employment and Support Allowance (ESA)

• Universal Credit

• Maternity Allowance

• Bereavement Support Payment

 

Class 2 NICs for the Tax Year 2023/24

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For the 2023/24 tax year, Class 2 NICs were £3.45 per week if your taxable profits exceeded £6,725. These contributions were made through self-assessment, alongside Class 4 NICs and income tax. If your business profits were below the threshold, you had the option to pay Class 2 NICs voluntarily to avoid gaps in your National Insurance record.

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Changes from April 2024

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In Autumn 2023, the UK government announced that Class 2 NICs would be scrapped for many self-employed individuals starting from the 2024/25 tax year. Here's how the changes work:

• Profits above £12,570: You won't need to pay Class 2 NICs but will be treated as if you have, protecting your entitlement to state benefits like the state pension and maternity allowance.

• Profits between £6,725 and £12,570: You won’t pay Class 2 NICs, but you will continue to receive National Insurance credits, protecting your benefits.

• Profits below £6,725: You won't automatically receive National Insurance credits, so you may need to pay Class 2 NICs voluntarily to protect your entitlement to benefits.

 

Should You Pay Class 2 NICs Voluntarily?

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If your profits are below £6,725, you’ll need to decide whether to pay Class 2 NICs voluntarily. To help with your decision, check your National Insurance record by logging into your personal tax account. This will show if you have any gaps in your contributions.

Remember, having gaps in your National Insurance record could reduce the amount of state pension or other benefits you're eligible for. For instance, to receive the full state pension, you need 35 qualifying years of contributions. If you have fewer than 35 years, your pension will be reduced. You must have at least 10 qualifying years to receive any state pension at all.

If you're employed as well as self-employed, your employer may already be deducting Class 1 NICs from your paycheck, which will count toward your National Insurance record. Also, check if you’re receiving National Insurance credits through other means, such as working tax credit.

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How to Pay Class 2 NICs Voluntarily

When completing your self-assessment tax return, you can choose to pay Class 2 NICs voluntarily. After entering your self-employment earnings, you’ll be prompted with the option to make this payment.

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What is Class 3 National Insurance?

Class 3 National Insurance is another type of voluntary payment that can be made to fill gaps in your National Insurance record. For the 2024 tax year, Class 3 NICs cost £17.45 per week and only count toward your entitlement to the state pension.

 

Class 2 vs. Class 3 National Insurance

Class 2 NICs are specifically for self-employed individuals and cover a wider range of benefits at a lower rate (£3.45 per week) than Class 3 NICs, which only contribute toward your state pension and cost £17.45 per week.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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