Self-employed with an HMRC payment plan? Watch out if you claim certain benefits

What are Class 2 National Insurance contributions?

Class 2 National Insurance contributions (NICs) are flat-rate weekly contributions paid by the self-employed in order to gain access to contributory benefits. If your taxable profits for 2019/20 were over £6,365, you must pay Class 2 NIC for each week of 2019/20 in which you were self-employed.

If your profits were up to £6,365 for 2019/20, or in some other limited cases, then you can pay Class 2 NICs on a voluntary basis for that year instead.

The amount would usually have been paid as part of your Self Assessment balancing payment that was due on 31 January 2021.

For more information, please see What National Insurance do I pay if I am self-employed?.

What is the issue?

Because Class 2 NICs are paid via Self Assessment, alongside tax and Class 4 National Insurance, they can be included in a Time-to-pay arrangement. This is a payment plan with HMRC under which taxpayers can spread payments over a period of up to 12 months (or longer). If you make the agreed payments, you can avoid late-payment penalties which would otherwise be charged – but you still be charged interest.

HMRC expect large numbers of taxpayers to make Time-to-pay arrangements this year, because of:

• general financial pressures as a result of the pandemic, and
• taxpayers having previously deferred their second payment on account for 2019/20, which would normally have been due by 31 July 2020.

This means that taxpayers may be making a Time-to-pay arrangements for the following amounts which would have been payable by 31 January 2021:

1. If unpaid, the deferred second payment on account for 2019/20.

2. Any balancing payment for 2019/20, which might include Class 2 and Class 4 National Insurance contributions if you are self-employed.

3. The first payment on account for 2020/21.

If you make a Time-to-pay arrangement with HMRC, any deferred second payment on account for 2019/20 will be cleared first because it has the earliest due date (31 July 2020). This can mean that you may not be deemed to have paid Class 2 National Insurance contributions until some time later. If, in the meantime, you need to make a claim for certain ‘contributory’ benefits – these are benefits which depend on you having paid sufficient National Insurance contributions – you may find that your claim is delayed unless you take the action as shown below.

How do I know if this issue will affect me?

In general, your eligibility for contributory benefits may be affected if:

• your benefit claim relies on Class 2 NIC being paid for weeks in the 2019/20 tax year; and
• you have not paid these amounts by the time you make the claim.

Most commonly, this issue is likely to arise where the claim is for contributory (‘new style’) Employment and Support Allowance from January 2021.

Example: Contributory (‘new style’) Employment and Support Allowance

Entitlement to contributory, or ‘new style’, Employment and Support Allowance has conditions relating to National Insurance for the two complete tax years before the calendar year of the claim.

Therefore, if you claim the benefit in February 2021, then you will need to consider contributions paid or credited in the tax years 2018/19 and 2019/20.

You may also be affected if you wish to claim Maternity Allowance.

Example: Maternity Allowance

If you’re self-employed, to get the full amount of Maternity Allowance you must usually have paid Class 2 NIC for at least 13 of the 66 weeks before your baby is due.

Suppose that you were self-employed up to 5 April 2020 and your baby is due in early April 2021. Your claim may rely on Class 2 NIC being paid for the final 13 weeks of the 2019/20 tax year.

In the above examples, you must have paid the relevant Class 2 NIC before the claim can be processed by the Department for Work and Pensions.

Certain other benefits also rely on Class 2 NIC having been paid. If your claim relies on Class 2 NIC which has not yet been paid, you should be given the opportunity to make a payment of the relevant Class 2 NIC.

If your Class 2 NIC liability is being collected under a Time-to-pay arrangement, you will need to contact HMRC to arrange payment of the Class 2 NIC separately and ensure the amount is removed from the Time-to-pay arrangement.

Otherwise, you can ask HMRC to ensure that amounts paid under a Time-to-pay arrangement are allocated against the Class 2 NIC liability for 2019/20 before other amounts (see below).

What should I do if my claim to contributory benefits relies on Class 2 NIC which has not yet been paid?

If your Class 2 NIC liability is being collected under a Time-to-pay arrangement, HMRC have published guidance to say that you can ask them to allocate payments against Class 2 NIC before other debts, such as a deferred payment on account from July 2020.

By doing this, you may incur additional interest charges – but if HMRC are able to allocate amounts already paid against your Class 2 NICs liability for 2019/20 then your claim to the benefit should be protected.

Even if you don’t have a Time-to-pay arrangement with HMRC, you may be able to ask them to reallocate amounts already paid (such as for your July 2020 payment on account) against the Class 2 NICs liability.

We understand that where this is possible and you make a claim to a contributory benefit which relies on Class 2 NIC being paid, the Department for Work and Pensions should refer you to a designated telephone number for HMRC to make the adjustment. You should then wait 72 hours for your record to be updated and then contact the Department for Work and Pensions again to make the claim.

What if I am employed as well as self-employed?

You may already be eligible for the benefit in question as a result of Class 1 NICs paid on your earnings from employment. You will need to check the relevant contributory conditions.

Where can I find more information?

Please refer to the guidance published on GOV.UK.