Class 2 National Insurance Wrongly Charged

:: 00:00

Having filed a gazillion tax returns already for our self-employed clients, we've noticed that HMRC have got a bit of a cockup that's happened. There's an error that's been made by them, and to their credit, they are going through to correct it. But if you are filing your own return, you may find that the numbers on that return are going to be wrong, and therefore there might cause slight palpitations to the system.

:: 00:25

But what I'm talking about is Class 2 National Insurance charged in error. Now, if you've seen those weird figures appear in your tax bill recently, and it's at odds with what you filed or your accountant has filed, this episode is right for you. I'm going to be covering what Class 2 National Insurance is and what's changed from April, 2024 onwards, why some wrong changes are still appearing,

:: 00:48

what do you do if it happens to you, and practical tips to protect your business. Let's crack on. Now firstly, what's actually changed in respect of Class 2 National Insurance contributions? And if you're sitting there thinking, what do you mean by Class 2, Mahmood? Well, when you do a Personal Tax Return, there are two types of tax that are going to be levied

:: 01:07

typically on your self-employed profits. There'll be income taxed, and there's also something called National Insurance. There's that small fiddly one and for the 24/25 year that's charged at three pound 45 a week, you then get another type of National Insurance called Class 4. Now, the Class 2 is the one that contributes and goes towards your state pension.

:: 01:29

More of that at the end of this podcast. Now what's happened is that effectively there's been a change in how National Insurance, the Class 2 has been charged from 6th of April, 2024. Now, it used to be a compulsory figure. You had to pay it, but the rules have changed. Now there is Class 2, but that's a voluntary payment only, and I'll tell you when it becomes voluntary and why you should do that.

:: 01:55

Now you choose to pay Class 2 if you need what's called a qualifying year for state pension purposes. Now, under current regulations, you need 35 years of qualifying National Insurance, the right type of National Insurance to be paid, in order to qualify for the full state pension. In general, for most people, the current retirement age at the moment is 67, and each year that you clock up gives you a little bit more of that maximum state pension.

:: 02:23

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:: 02:47

Now, here's the key numbers. You've got what's called a small profits threshold, the amount of 6,725, and by small profits, by the way, we're talking about taxable self-employed profits. You also have what's called a voluntary Class 2 weekly cost running at the amount of 3.45, and that's equivalent to 179 pounds and 40 pence for the full year.

:: 03:09

Now, if you've got profits between 6,725 and 12,570 and that 12,570 you might recognise, by the way, as your Personal Allowance, you get what's called automatic credits. You don't physically need to pay anything and you’ll automatically be credited with the contribution going towards your state pension.

:: 03:27

Now, if you've got profits in excess of 12,570, for the year, you pay National Insurance, but you pay what's called Class 4. Now that Class 4 doesn't entitle you to any state pension access or state-related benefits. It's a tax. So what the reality is, if your profits subject to tax exceed that 12,570, there should not be any Class 2 payable by yourself. But unfortunately,

:: 03:50

this is where the slippage has happened, and many people when they get their bills from HMRC or they've done it themselves, may suddenly see there's that small amount that's charged on the tax calculation. But that's wrong. Those charges have been applied in error, and the most common wrong figure that I've seen appear from other people is 358 pounds and 80p.

:: 04:11

And that's exactly double the voluntary annual charge. Now others are being smaller, but they're still incorrect amounts. Now that could, as I said, impact in terms of if money is really tight, add to a little bit of stress because you think the calculations should be correct. But remember, HMRC are aware of the error and they're going through to tidy it up.

:: 04:30

Some accounts for taxpayers have been updated automatically. For others, letters may still arrive with the wrong charges until those systems catch up. Anyone who's familiar with HMRC and I've got 30 years plus of that, knows that HMRC is like a big juggernaut, a big ship, okay? It doesn't always respond very quickly, but it is still reacting.

:: 04:51

Now, HMRC says, don't panic, which is quite unusual for them. They'll either refund you or adjust your self-assessment balance. So the key is check your account and keep good records. Now at the end, I'm going to comment about the voluntary contribution and reinforce why I think it should be paid. Now, what do you need to do?

:: 05:09

There's a four step action plan. Step number one, check your 24/25 self-assessment. Look at the tax calc. Check your personal tax account and check the National Insurance entries. If your taxable profits are above 12,570 and Class 2 appears, that’s likely to be wrong. Now we do this for our clients when we do their tax returns.

:: 05:28

We send a video explainer. We show the breakdown in composition, so we picked up the error at the beginning, albeit HMRC may inadvertently adjust it when they receive it. Step two, make sure you've got documented evidence. So obviously you can have your tax return, the calculations. If you have to call them,

:: 05:46

make sure you've got a good strong cup of coffee. Make a note of any names, copies of letters, and that will resolve the dispute at a faster rate. Now, if you do need to contact HMRC, make sure you do it in the right way. Self-assessment account is used to raise the query. Attach your figures and if you have to, as I said, HMRC will have these figures on file, have that patience and have that discussion, or you could just let it chug through the system.

:: 06:11

And step four, don't give money over to HMRC that you don't owe them. Remember the filing deadline is 31st of January, 2026. It will hopefully resolve itself by then, but don't hold your breath. Now, the thresholds, as we said, let me just repeat what they are: 6,725 if your profits are up to that level, you don't have to pay Class 2, but I would recommend that you do pay them. And all our clients that have got profits at that level,

:: 06:36

we recommend that they pay them. We recommend they check their National Insurance records, their pension forecast to see where they stand. If they need to make that additional payment, then for the sake of 176 odd pounds, then it makes good sense to buy that one year's worth of contributions. Now voluntary Class 2 is cheaper than what's called Class 3, which is the voluntary type, but check your records and do a pension forecast.

:: 06:59

Now, common pitfalls to avoid. Don't ignore letters from HMRC that look odd. Check the calculations. If in doubt, always check out and see if you want to get an accountant to help you with this. Don't assume the system will fix itself. HMRC is a big beast and these things do take time. Now if you want some help, some additional resources, please do check our website and our YouTube channel,

:: 07:19

I Hate Numbers. We have got information on there on pension forecast, state pension, National Insurance. If you're finding tax a bit of a problematic thing to do, then by all means, book a call and we can have a chat. Until next time, folks, plan it, do it and profit.