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Class 2 National Insurance Contributions: What You Need to Know

If you’re self-employed in the UK, you may want to pay Class 2 National Insurance (NI) contributions. You may be wondering why anyone would want to hand over their hard-earned cash if it’s not legally required, but your contributions mean you’re eligible for benefits like State Pension, which we’ll cover in more detail below. 

Who Needs to Pay Class 2 National Insurance?

You’ll need to pay Class 2 NI if your profits from self-employment are above the Lower Profits Limit. For the 2023/24 tax year, the Lower Profits Limit is £12,570. But if your profits are below this amount, for example, you’ve just started out, have returned from maternity leave or perhaps you’ve gone part-time, you don’t need to pay any Class 2 NI contributions.

What Are the Benefits of Paying Class 2 National Insurance?

Whilst Class 2 NI contributions aren’t mandatory, there are lots of good reasons why you should keep them up:

  • The age at which you become eligible for a State Pension depends on what year you were born but as a general rule, it’s currently 66.
  • At some point, you may need and be eligible for benefits, such as unemployment benefits or maternity allowance as long as you’ve been self-employed for 26 weeks in the 66 weeks before your due date.

Paying Voluntary Class 2 National Insurance

Even if your profits are below the Lower Profits Limit, you’re still able to pay voluntary Class 2 NI contributions to make sure that you’re eligible for the State Pension and other benefits should you need them. 

How Much Do You Pay?

Currently, the amount of Class 2 NI you’ll need to pay is fixed at £3.45 per week for the 2023/24 tax year. 

When Do You Pay?

Most self-employed people pay their Class 2 NI contributions through their annual self-assessment tax return.

How to Pay Class 2 National Insurance Contributions

Class 2 NI contributions can be paid online, by phone or by post. To pay online, you’ll need to create an account on the HMRC website. To pay by phone, just call HMRC’s self-assessment helpline. To pay by post, download a payment form from the HMRC website.

More on State Pension

As we mentioned above, one of the biggest benefits of voluntarily keeping your Class 2 NI contributions up to date is being eligible for the State Pension when you reach the right age. 

The State Pension is a government-funded payment to people who have reached retirement age and provides them with an income for the rest of their lives. The amount of State Pension you receive depends on the amount of National Insurance contributions you’ve previously paid. If you don’t have enough ‘qualifying years’, you may not be entitled to the full State Pension when you reach retirement age and will have to fund your living expenses (and the things you like to do) some other way. 

Mortgage matters

Plus, depending on your age, such as if you’re applying when you’re above retirement age, if you don’t have enough of a State Pension then it can affect your ability to get a mortgage. This is because lenders will want to see that you have enough income to meet your mortgage repayments. If your State Pension isn’t enough to cover your monthly payments, you may need another source of income, such as a personal pension or a part-time job.

Lenders will also consider your age when they assess your mortgage application. If you’re coming up to retirement age, they may be more cautious about lending to you and wonder whether you’ll be able to work and earn an income in the future.

Some lenders will ask for confirmation of your Class 2 NI contributions. In these situations, they’ll ask to see your copy of your confirmation and that of HMRC to make sure the details match. If they don’t, it may delay the process.

So, if you’re self-employed, it’s important to understand your Class 2 NI obligations to make sure you’re paying the correct amount and reap the rewards of keeping them up to date when you need them. 

Important point on pensions

If you’ve received any correspondence from HMRC regarding tax amounts stating a figure that’s different to what you’ve been told by your accountant, let them know immediately because it could be linked to the Class 2 State Pension.

We hope this blog has been useful but if you’ve any questions about Class 2 National Insurance, please get in touch.

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VAT Turns 50: Our Review of the Highs and Lows of This Tax in its 50th Year

As the UK’s VAT turns 50, as accountants, we review the highs and lows of this tax in its 50th year.

Value Added Tax (VAT) was introduced in the UK on 1 April 1973 to replace the old purchase tax. It is a consumption tax charged on the sale of goods and services. Over the last half a century, we’ve seen the welcome highs and horrible lows of VAT. So, here are our observations.

VAT highs

You might think that there haven’t been many highs for VAT over the last 50 years but:

  • VAT’s been a very successful tax for the UK government. It’s relatively easy to collect and generates a significant amount of revenue.
  • It’s helped simplify the UK’s tax system. By replacing several other taxes, it’s easier for businesses to calculate and pay their taxes.
  • VAT helped promote cross-border trade. Applying the same tax rate to goods and services sold in different countries makes it easier for businesses to trade internationally.

VAT lows

As you’d expects there is a list of lows when it comes to the impact of VAT, such as:

  • VAT can be a complex tax for businesses to comply with. As we’re sure you already know, there are several different rules and regulations that you need to know about and it can be tricky to keep up with changes to the law.
  • It’s a pain for consumers’ pockets. Added VAT on goods and services makes them more expensive, which means they may be more reluctant to spend.

Looking to the future

As we look to the future, VAT will continue to be an important source of revenue for the UK government. However, it’s also likely that the tax will continue to evolve with changes to VAT rates or new rules and regulations.

The UK may adopt a different approach to VAT in the future, for example, moving to a single rate of VAT or adopting a destination-based taxation system.

Only time will tell what the future holds for VAT. However, one thing is for sure, VAT will continue to be a major factor in the UK tax system for many years to come. As accountants, we closely monitor VAT developments and are here to help you understand, and comply with the latest VAT rules and regulations. Get in touch if you’ve got any VAT-related questions.