Chapter 24 Classes 2 and 4 National Insurance

Question 1

Class 2 and class 4 NIC, annual maxima and deferment of NIC

Answer 1

Class 2 – flat rate contribution, currently payable at £3 a week. The amount is calculated based on the number of weeks of self-employment within the tax year. Where profits for the year do not exceed the small profits threshold (£6,365) there is no liability to class 2 NICs. However, an individual can pay voluntary in order to preserve their entitlement to the state pension and other benefits. 
Class 4 contributions – are payable on 9% on profits between £8,632 and £50,000 with an uncapped 2% payable on profits above £50,000. Profits in this context are the trading profits for the tax year. Class 4 NICs are payable in the same way as self-assessment with payments on account.
Annual maxima – this applies for individuals with either two jobs or is employed and self-employed. This sets a maximum cap of NICs to ensure an individual with two jobs pays the same NIC than an individual earning the same amount but has one job. The maximum amount is not fixed and there are two tests to determine the amount. Test 1 looks at classes 1 and 2 and may result in a reduced liability for class 2 NICs and maybe class 1 if appropriate. Test 2 may result in a reduced amount of class 4 contributions payable. HMRC calculates the annual maxima automatically.
Deferment of NIC – deferment of class 1 primary contributions applies where the taxpayer has more than one employment. NICO will determine for which of the employments deferment is granted, the employee will continue to pay class 1 contributions at 2% on earnings in excess of the primary threshold. Deferment does not apply to classes 2 and 4.