Sarah Laing runs through forthcoming changes to National Insurance contributions, and in particular how they may affect landlords.
Whether or not a landlord is currently liable to pay Class 2 National Insurance Contributions (NICs) depends on whether the landlord falls within the definition of a ‘self-employed earner’ for NIC purposes, and if so, whether profits are in excess of the existing small profits threshold (£6,025 for 2017/18).
The definition of a self-employed earner is set out in the Social Security Contributions and Benefits Act 1992 (s 2(1)(b)) as someone ‘who is gainfully employed in Great Britain otherwise than in employed earner’s employment (whether or not he is also employed in such employment)’. Generally, but not always, a person who is regarded as self-employed for income tax purposes and who is taxed on the profits from their trade, profession, or vocation will also be regarded as a self-employed earner for NIC purposes and as such will be liable to pay Class 2 (and also Class 4) NICs. By contrast, a person who receives investment income is not liable to pay NICs on that income.
Being liable to pay Class 2 NICs is not necessarily a bad thing – these contributions give the payer access to certain contributory-based benefits for a relatively cheap investment - £2.85 per week for 2017/18 (equating to £148.20 for the year). To date, where NICs are not otherwise payable, it may be advantageous for landlords to consider turning ‘investment’ letting into a business to bring it within the scope of Class 2 NICs – in particular, this may be a cheap and effective way to build up entitlement to a state pension.
Abolition of Class 2 NICs
Self-employed people may currently be required (subject to certain criteria) to pay both Class 2 and Class 4 NICs. Class 4 NICs are, broadly, calculated by reference to the payee’s profits. For 2017/18, they are payable at the rate of 9% on profits between £8,164 (the lower profits limit (LPL)) and £45,000 (the upper profits limit (UPL)), and at 2% above £45,000.
NICs for the self-employed will fundamentally change from April 2018. From that date, Class 2 contributions will be abolished and the Class 4 contributions system will be reformed to include a new threshold (the small profits limit (SPL)). It is not yet known what the new profit limits will be. We do, however, know that after Class 2 NICs have ended people with profits between the SPL and LPL will not be liable to pay Class 4 contributions, but will be treated as if they have paid Class 4 contributions for the purposes of gaining access to contributory benefits. All those with profits at or above the Class 4 SPL will gain access to the new state pension, contributory employment and support allowance (ESA) and bereavement benefit. Those with profits above the LPL will continue to pay Class 4 contributions.
The abolition of Class 2 NICs will have adverse consequences for those with profits below the current small profits threshold, who are not obliged to pay Class 2 NICs but are doing so voluntarily in order to build up their contributions record. If they wish to continue to secure contributory benefits by paying NICs after April 2018, they will instead have to pay voluntary Class 3 contributions, currently payable at the rate of £14.25 per week – this is five times the Class 2 contribution rate, and makes a difference of £592.80 based on 2017/18 rates!
Self-employed businesses and landlords should check their NICs record for the last few years. This is a relatively straightforward process and can be done online at https://www.gov.uk/check-national-insurance-record. Those wishing to protect their state pension entitlement should ensure that they have paid, and continue to pay, as many Class 2 contributions as they need to before abolition in April 2018. A total of 35 years of contributions paid or credited is currently needed to secure entitlement to the full state pension. The minimum needed to secure any state pension is ten years.
This article was first printed in Tax Insider in September 2017.