The key change announced for the self-employed was the ‘headline’ abolition of Class 2 national insurance and the reduction in the rate of Class 4 national insurance, both with effect from 6 April 2024.
Class 2 national insurance is a flat rate charged at £3.45 per week and is there to preserve entitlement to contributory state benefit for the self-employed. It is seen more of as administrative burden for many rather than an excessive cost, but eliminating any burden has got to be a positive move and an easy decision to make given the revenue it raises.
However, regardless of what the headlines say, it is not actually being abolished. Although a national insurance credit will be provided in certain cases to preserve entitlement to contributory state benefits, those with profits less than £6,725 a year will still need to make voluntary contributions in order to retain those benefits.
Class 4 national insurance is based on profits from self-employment, and to ensure some equality with the employed (given the reduction to the rate of the primary Class 1 national insurance contributions), the main rate of Class 4 national insurance will be reduced from 9% to 8%.
Noticeably, the changes to Class 1 national insurance are more favourable (as a reduction of 2% and being effective from 6 January 2024) but the overall rate of Class 4 national insurance remains at a lower level.
Cash or accruals?
Aside from this, there were also changes announced to the basis on which the self-employed report their profits.
Currently, the default method is the accruals basis – with income and expenses being matched to the period to which they relate. However, certain taxpayers can elect for the cash basis, bringing into account only income received and expenses incurred in the period.
This is to be flipped on its head, with the cash basis now becoming the default from 6 April 2024. In doing this, the current restrictions around turnover (which only allow businesses with turnover less than £150,000 to enter the scheme and requiring businesses with turnover exceeding £300,000 to leave the scheme) will be removed.
In addition, the current restrictions applying to the cash basis with regards to the deductibility of interest and the utilisation of losses will be removed, bringing the cash basis in line with the accruals basis in this respect.
That said, the current exclusions which prevent the cash basis being used for property businesses or farmers and artists under the averaging provisions will remain in place.
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