State pension National Insurance class contributions reforms and rules explained | Personal Finance | Finance

Some of the worst affected will be Britain’s lowest earners, who are set to see the cost of building up access to the full state pension quadruple from £2.85 a week to £14.45.

Under changes put in place by former chancellor George Osborne, Class 2 National Insurance Contributions (NIC) will be axed from April 2018.

It means self-employed workers earning less than £6,025 a year, who wants to qualify for the full state pension, and have no other means of building credits, will have to pay Class 3 contributions, which are four times the cost.

Tom Selby, senior analyst at AJ Bell, said: “Clearly those who feel the pinch from this change will be angry at having to pay more money to receive the full state pension.

“A reform that effectively penalises low-earning strivers also risks becoming politically toxic for a Government that has already had its fingers burned over raising taxes for the self-employed.”

People on low incomes are also able to earn credits to build up pension entitlement in other ways, for example if they’re on universal credit, they’re a carer or have children under the age of 12.

However, self-employed workers earning between £6,025 and £8,164 will benefit from reforms and the end of Class 2 contributions.

Under the changes, people in this bracket will get the rights that come with Class 4 contributions, without having to pay contributions by by building up credit in other ways.

Kate Smith, Head of Pensions at provider Aegon, said: “When Class 2 NICs are abolished from April and replaced by reformed Class 4 NICs there will be winners and losers.

“The winners will be the self-employed with annual profits between £6,025 and £8,164 (2017/18) as they will no longer have to pay any NICs but will receive NI credits building up entitlement to the State pension.

“Unfortunately the UK’s lowest earners, those self-employed with profits below £5,965, who don’t receive NI credits for being a carer or having children under the age of 12, will be the losers.

“They will no longer have the option to pay the soon-to-be abolished cheaper Class 2 contributions, instead they can opt to pay Class 3 contributions, which are more than four times the cost.

“This will simply be unaffordable for low earners and the long-term consequences could be dire.

“If they have long stretches of very low earnings, and are unable to afford to pay the more expensive Class 3 NICs they won’t build up the full State pension, and they are unlikely to have a private pension, leaving them little retirement income to live on.”

Workers who are left worse off the changes, have been urged to consider paying voluntary Class 2 contributions before it is closed in April.

According to the Government, around nine out of 10 self-employed works will gain from the changes.

A HMT spokesperson said:  “This change reforms an outdated, regressive tax.

“Over 90 per cent of self-employed individuals will either gain or not lose out from the reform of Class 2 National Insurance.

“Self-employed people will now have access to the new State pension, which is worth an additional £1,800 a year compared to the previous system.”

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