There are proposed changes to the national insurance system which will impact on a number of people, and in particular those who have left the UK to work overseas.
The proposal is that Class 2 national insurance contributions (NIC) will be abolished. Class 2 is £2.85 per week from 5 April 2017 and for UK residents it is normally paid by self-employed people, together with Class 4 NIC, which is charged as a percentage of profits made. Class 4 was, of course, a major feature of the recent Budget, with the announced increase now not taking place!
I always thought that it was unnecessarily complicated for the self-employed to pay two types of NIC and the abolition of Class 2 should make things simpler.
One of the (many) quirks of the tax system is that Class 2 NIC contributes towards your benefit entitlements; most significantly, the amount of state pension you receive on retirement. Class 4 NIC, however, is in reality just a tax charge. Reforms are therefore being made to Class 4 NIC so that it will carry the benefit entitlements once Class 2 disappears.
So what is the concern for people working overseas?
In some cases, it is possible for a person who was living in the UK to pay voluntary national insurance contributions when they move to live and work overseas. This allows that person to maintain benefits such as state pension entitlement for their eventual return to live in the UK.
Currently, a person who meets the right conditions can pay voluntary NIC at the Class 2 rate, that is, just £2.85 per week.
Once Class 2 NIC has been abolished those people will have to move to standard voluntary Class 3 contribution, which is £14.25 per week. That is quite an increase!
To some degree, this is an investment decision as the payment of Class 3 NIC is usually only done to attain a better state pension upon retirement. Financial advice may be needed to decide whether it is worthwhile moving from Class 2 to Class 3 when this change is finally in place.
When does it take affect?
The changes should come in from April 2018 and it is hoped that HMRC will have time to contact those working overseas before then, so that they can decide whether to switch to Class 3 contributions or not.
For those people working abroad and paying voluntary Class 2 contributions, now is a good time to review whether it still makes sense to pay voluntary contributions and budget for the increased rate.