Contractor National Insurance consultation

Friday 19 July 2013

For many contractors and freelance workers, managing their own tax is one of the drawbacks of self-employment. Whether working as a sole trader or through a limited company it can be difficult to stay on top of exactly how much tax is owed and when it needs to be paid. HMRC appears to be aware of at least some of these concerns, having just launched a consultation on the way self-employed professionals pay their National Insurance contributions.

Under the proposals put forward today (July 19th), class two National Insurance contributions would be collected at the end of the tax year through the Self-Assessment system, along with class four contributions and income tax.

HMRC says that the new plans would allow the tax system to better accommodate different types of self-employment, including those who have chosen to work as independent contractors as well as those who take on freelance work on top of employment. The system could also better cater to taxpayers who are only temporarily self-employed or who have lower profits; HMRC admits that these groups currently find the system far less straightforward than those who work for themselves on a permanent basis.

Having held informal talks with self-employed people, HMRC says, it found that that the current Self Assessment system can be difficult to negotiate and many contractors are unaware of how some rules and processes work in practice.

A number of self-employed workers did not know the difference between class two and class four National Insurance contributions, for example, while others thought that they were fulfilling their obligations just by paying class four contributions through their Self Assessment return. In addition, some self-employed workers thought that they were automatically exempt from class two contributions if their profits were low, without any knowledge of the Small Earnings Exception. A number of contractors were confused about when and how they could defer their class two contributions or claim refunds.

Because almost all self-employed people already need to fill in a Self Assessment return, the Office for Tax Simplification has recommended the switch to collecting both forms of National Insurance through the same channel.

According to the consultation document, the fact that class two contributions are collected in-year before profits are declared currently creates extra paperwork both for self-employed people and the tax authority. Making sure both are collected at the same time may cut the bureaucratic burden of the UK’s smallest businesses.

Instead of the current system, Self Assessment forms would be changed to ask for the start and end dates of any self-employment and whether the taxpayer wanted to apply for the Small Earnings Exception (SEE). Class two contributions would then be calculated within the Self Assessment system and paid with the rest of the outstanding tax liability. Exceptions would then be expanded for those who might need to claim Maternity Allowance or Employment and Support Allowance for part of the year.

Although class two collection is the focus of the consultation, the government is also asking for the views of contractors and self-employed professionals on other ways to simplify National Insurance for them. Aligning the rules for class two and four contributions is one of the suggestions, along with the abolition of the SEE to make room for a simple threshold of National Insurance eligibility.

The consultation will run until October 9th. Once the responses have been collected, the government will release a summary of the responses in time for the Treasury’s Autumn Statement.

By Victoria McDonnell

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