Class 2 NIC refunds made in error – Action to take

Class 2 National Insurance contributions are flat-rate contributions for 2023/24 and earlier tax years are payable by the self-employed where their profits exceed the relevant trigger threshold.

For 2023/24 and 2022/23, the liability to pay Class 2 contributions arose where profits exceeded the lower profits threshold (set at £12,570 for 2023/24). For those years, self-employed earners whose profits were between the small profits threshold (set at £6,725 for 2023/24) and the lower profits threshold were treated as having paid Class 2 National Insurance at a zero rate, giving them a qualifying year for state pension purposes for zero contribution cost. For years before 2022/23, self-employed earners whose profits exceeded the small profits threshold were liable to pay Class 2 contributions.

Self-employed earners whose profits from self-employment are below the small profits threshold can opt to pay Class 2 contributions voluntarily to secure a qualifying year. This is a cheaper option than paying voluntary Class 3 contributions.

The liability to pay Class 2 contributions was abolished from 2024/25. However, self-employed earners with profits below the small profits threshold remain eligible to pay Class 2 contributions voluntarily.

Collection through Self-assessment

Class 2 National Insurance contributions are collected through the Self Assessment system, as for income tax and Class 4 National Insurance contributions. They are payable by 31 January after the end of the tax year to which they relate. However, unlike Class 4 contributions, they are not taken into account in calculating payments on account.

The collection of Class 2 contributions has not been without problems, and there have been reports of HMRC reversing the Class 2 charge in the Self Assessment calculation because the self-employment has not been recorded correctly on HMRC’s National Insurance computer system. Further problems arose in respect of Class 2 contributions paid voluntarily for 2022/23 where the payment was made on or slightly before the due date of 31 January 2024.

Repayment of 2022/23 voluntary contributions

As a result of a delay by HMRC in processing payments, voluntary contributions paid on time for 2022/23 were treated as having been paid late, with HMRC reversing the voluntary Class 2 charge. As a result, the self-employed earner may have received a refund from HMRC. If they have not received a refund, the payment will either be showing as a credit in their Self Assessment account or have been allocated to a different Self Assessment liability.

If you are self-employed and paid Class 2 contributions voluntarily for 2022/23, you can check on the HMRC app to see if the contributions paid for that year are showing on your National Insurance record. If the contributions have been refunded, held as a credit, or allocated elsewhere, the year will not be a qualifying year, which may affect your state pension entitlement. You can call HMRC on 0300 200 3500 for assistance.

The professional bodies have been pressing HMRC to resolve this issue. However, HMRC has now advised that they are unable to do so. The need for individuals to call HMRC for help will place further pressure on HMRC helplines which are already struggling to cope.

Individuals must check their National Insurance records and state pension forecasts regularly to rectify errors before they become too late.

Partner note: SSCBA1992, ss. 11–12; www.icaew.com/insights/tax-news/2024/jun-2024/voluntary-class-2-nic-repaid-in-error.

                                               For more information, Book a Free Consultation