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UK Eyeing National Insurance Reforms

by Robert Lee,, London

16 December 2015

The UK Government has launched a consultation on proposals to levy just one class of National Insurance (social security tax) on self-employed persons, by abolishing Class 2 National Insurance contributions.

Currently, Class 2 is paid if a self-employed person's taxable income is GBP5,965 (USD9,049) or more a year. Class 4 is paid if a person's taxable income is GBP8,060 or more a year. Class 2 is charged at GBP2.80 a week, and Class 4 is charged at nine percent on profits between GBP8,060 and GBP42,385, and two percent on profits over GBP43,385.

Class 2 National Insurance contributions (NICs) currently provide the self-employed with access to a range of state benefits. Class 4 contributions were introduced with the aim of ensuring that the self-employed pay a fair share of the costs associated with providing contributory benefits.

According to the consultation, abolishing Class 2 NICs would require the introduction of a new contributory benefit test for the self-employed. It would mean that those with annual profits equal to or above a certain level could accrue qualifying years for entitlement to the state pension and meet the new contributions tests for other contributory benefits through Class 4 NICs.

These changes would not be implemented until April 2017 at the earliest. Responses to the consultation will be used to inform the Government's decision on how and when to proceed with the abolition of Class 2. The deadline for responses is February 24, 2016.

TAGS: tax | pensions | United Kingdom | tax thresholds | ministry of finance | self-employment | tax rates | social security | tax reform | individual income tax

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