Don’t be surprised if your class 2 national insurance direct debit disappears

HMRC is making your life easier. You have heard correctly; one of the nice things that is coming in April 2015 is a switch to annual Class 2 national insurance contributions as part of your self assessment. So if you wonder why your national insurance direct debit suddenly stops in August, then read on to find out more.


What is Class 2 National Insurance?

National insurance contributes towards your state pension and certain other benefits; the amount of contributions you make during your working lifetime affects the level of pension you receive. There are different classes of national insurance contributions (NIC) for different types of workers. If you are employed on a payroll, you pay Class 1 NIC which get taken automatically via PAYE. Class 2 and Class 4 national insurance allow self employed people to make the necessary contributions.

The current profit threshold level for Class 2 NIC is £5,885 per year. If you earn below this level from self employment you can choose to opt out. For example if you are employed as well as self employed and are making sufficient Class 1 contributions via PAYE, you might chose to opt out of Class 2 NIC.

If you are self employed and earn over £7,956 (for 2014-15) then you also pay annual Class 4 NIC as well.

What is happening?

Currently Class 2 NIC are billed six monthly or taken via a monthly direct debit. Both of these methods will be replaced with a single annual calculation as part of your self assessment tax return. This already happens with your Class 4 national insurance, so it makes sense to do the same with Class 2 as well.

The self assessment will work out how much you need to pay for the year, based on the information you provide in your self assessment return. At the moment you have to guess whether or not you will be under the limit, then either opt out if you are under or make separate payments if you are over; the new system should make things a little less complicated.

If you are under the small profits threshold you will still get the option to voluntarily pay the Class 2 NIC in order to protect certain benefits and your State Pension.

Who will it affect?

Anyone who is registered as self employed, whether above or below the threshold for Class 2 NIC.

What if I’ve opted out?

If your earning are under the small profits threshold and you have a Small Earnings Exemption certificate then you won’t need to renew it for 2015-16. In future your self assessment will automatically calculate whether your earnings are under the small profits exemption level.

When will they stop?

Although the change comes into effect from April 2015, the payments are collected with a 4 month lag, so your last direct debit payment under the old system will be due on 10 July 2015. This will cover the period to 5 April 2015 so there will be no Class 2 NIC in your 2014-15 self assessment return.

Do I need to do anything?

The six monthly bills and direct debits will stop automatically, so as long as your payments are all up to date, you don’t need to do anything for a while. Just make sure you don’t owe anything if you are not paying by direct debit.

The Class 2 NIC due will be calculated automatically in your 2015-16 self assessment tax return, which will be due for submission and payment in January 2017.

If you want to make payments in advance, rather than waiting for your tax bill, you can set up a budget payment plan. The HMRC will be providing more information on this, but it looks like you will be able to set it up via your HMRC online account.