Research and analysis

Understanding self-employed customer experiences of bringing payment of Class 2 National Insurance contributions into Self Assessment

Published 26 January 2023

Prepared by Ipsos for HMRC

Amrita Sood, Andrew McKeown, Grace Atkins (Ipsos)

Research report number: 691

July 2022

The views in this report are the author’s own and do not necessarily reflect those of HM Revenue and Customs.

Glossary and abbreviations

Class 2 National Insurance contributions (NICs)

A class of National Insurance paid on a voluntary or compulsory basis, depending on profits. It was £158.60 for the 2021 to 2022 tax year, when this research was conducted.

Self Assessment

The system HMRC uses to collect Income Tax that is not automatically deducted from wages, pensions and savings. Self-employed individuals are responsible for declaring their taxable income and filing a tax return by completing and submitting their Self Assessment after the end of the relevant tax year.

The old payment system

The system for paying Class 2 NICs that was in place until the 2015 to 2016 tax year. Payments were made separately to other taxes and were paid regularly throughout the year, by Direct Debit or paper bills.

The current payment system

The system for paying Class 2 NICs as part of Self Assessment that has been in place since the 2015 to 2016 tax year.

Small Profits Threshold (SPT)

Self-employed individuals with profits at or above the SPT must pay Class 2 NICs. This was £6,475 in the 2021 to 2022 tax year. Customers whose profits do not reach the SPT can choose to pay Class 2 NICs voluntarily to qualify for certain benefits.

Self-employment income

In this research, self-employed individuals were asked to disclose their income band to give an overall indication of their income from self-employment. It did not specify gross or net self-employment income, or include income from other sources besides self-employment (such as from employment).

Lower income self-employed individuals

Self-employed individuals who defined their current income from self-employment as being below the Income Tax Personal Allowance (see definition for self-employment income).

1. Executive summary

1.1 Introduction

HM Revenue and Customs (HMRC) commissioned Ipsos to conduct research to understand self-employed individuals’ experiences of bringing payment of Class 2 National Insurance contributions (NICs) into Self Assessment.

From April 2015, the mechanism used by self-employed individuals to pay Class 2 NICs changed. Prior to this date, self-employed individuals paid Class 2 NICs either bi-annually or monthly by Direct Debit. Other personal taxes, including Income Tax and separately Class 4 NICs, were paid through Self Assessment.

The aim of this research was to understand:

• whether the mechanism change made it easier for self-employed individuals and tax agents to pay Class 2 NICs
• what the impacts of the change were for self-employed individuals, including on any additional processes required for self-employed individuals claiming Maternity Allowance

1.2 Methodology

The research included 30 in-depth interviews with self-employed individuals and tax agents, each lasting around 45 minutes. Self-employed individuals who had specifically been self-employed and paying Class 2 NICs both before and after the change to the payment system were recruited to participate. Similarly, tax agents were recruited on the basis that they had arranged payment of Class 2 NICs for their clients both before and after the change.

The findings in this report refer to the experiences, perceptions and opinions of the 25 self-employed individuals and 5 tax agents who took part in qualitative depth interviews. Participants were recruited to ensure the sample reflected a diversity of characteristics and circumstances (see section 2.3 for full details of the sampling approach).

This study used purposive sampling to ensure a good mix of eligible self-employed individuals and tax agents were included in the sample. This study has been designed to generate in-depth understanding of participants’ experiences of paying Class 2 NICs under both payment mechanisms.

1.3. Key findings

Understanding of the two payment systems

Self-employed individuals were generally aware that they paid Class 2 NICs via Self Assessment as a single annual payment. Self-employed individuals who did not use a tax agent typically demonstrated a clear understanding of how much they had to pay for Class 2 NICs and when. Self-employed individuals who did use an agent were typically less clear about the details of paying Class 2 NICs. They were happy for their agent to handle this.

Self-employed individuals were broadly happy with using both systems to pay Class 2 NICs. However, there was some variation in preferences between the two systems according to self-employed individuals’ circumstances. Those with profits equal to or above the Small Profits Threshold (SPT) preferred the current system because it was more efficient for paying Class 2 NICs. Those with profits below the SPT generally preferred the old payment system because they found it more manageable to pay Class 2 NICs monthly via Direct Debit.

Among tax agents, preferences between the two payment systems were also influenced by the circumstances of their clients. Tax agents whose clients had profits at or above the SPT were positive about the current system. They could process their tax returns at once and did not have to spend time explaining to their clients why they had to make a separate payment for Class 2 NICs. However, tax agents with clients below the SPT felt that paying Class 2 NICs under the old system, via Direct Debit, was more manageable.

Awareness and experience of the change to the payment mechanism

Awareness of the change to the payment mechanism varied among self-employed individuals according to whether they had used a tax agent. Those who did use an agent were aware only that the change had happened. Those who did not use an agent were generally more aware of the details of the change.

Nevertheless, for many self-employed individuals, it was important that they knew that the change to the payment system had not impacted their eligibility for relevant pensions and benefits. This concern was reflected by tax agents, who recalled their clients asking for confirmation that they would continue to pay Class 2 NICs after the change to the payment system.

Self-employed individuals who felt they understood their general tax obligations, and described themselves as organised, were confident about understanding the change to the payment system for Class 2 NICs. They were satisfied with the information they received from HMRC about this at the time.

However, other self-employed individuals were less clear about the change. For some, this was because they relied on their tax agent to handle the change to the payment system for them. Others were not satisfied with how the change had been communicated to them, specifically how it was relevant to their personal circumstances.

1.4 Impacts of bringing payments of Class 2 NICs into Self Assessment

Benefits of the current system

Most self-employed individuals felt the current system made it easier to pay Class 2 NICs. Most self-employed individuals did not feel the current system made it more difficult to pay Class 2 NICs. They felt the change in the payment mechanism was straightforward and aligned with how they meet their other tax obligations under Self Assessment. Those with profits at or above the SPT particularly felt it was manageable to pay Class 2 NICs as part of their overall Self Assessment tax return. Similarly, those who were confident about managing their tax obligations themselves were happy to pay Class 2 NICs through Self Assessment. They felt it was more efficient than paying separately via Direct Debit under the old system.

Challenges using the current system

Some self-employed individuals experienced challenges when paying Class 2 NICs under the current system. Some lower income self-employed individuals found it more difficult to make the single annual payment under the current system, compared to making smaller monthly payments under the old system.

Bringing Class 2 NICs into Self Assessment required some lower income self-employed individuals to complete a Self Assessment tax return for the first time. Furthermore, self-employed individuals who were unfamiliar with using the internet found it difficult to complete their Self Assessment return online, with some relying on a tax agent to complete the Self Assessment return for them.

Claiming Maternity Allowance

This research included self-employed individuals who had claimed Maternity Allowance both before and after the change to the payment mechanism for Class 2 NICs. These individuals did not report any additional challenges to making an application for Maternity Allowance after this change. They felt the application process was straightforward and seamless, and they did not have any concerns about claiming Maternity Allowance.

Ideas for improvements

Self-employed individuals shared suggestions for how the payment system for Class 2 NICs could be improved. Ideas from some lower income self-employed individuals included introducing different payment options to make payments more manageable, such as a monthly Direct Debit.

While not being about the change to the payment mechanism itself, self-employed individuals who were not confident about processing their payment online felt that paying Class 2 NICs under Self Assessment could be made easier to use and more accessible. They felt that technical language used in communications from HMRC could be simplified to help increase self-employed customers’ understanding of Class 2 NICs.

They also felt the GOV.UK website could be made easier to navigate, which would help self-employed individuals find the information they need about Class 2 NICs. This would help them feel more confident about paying Class 2 NICs through Self Assessment.

2. Introduction

2.1 Research context

HM Revenue and Customs (HMRC) commissioned Ipsos to conduct research to understand self-employed individuals’ experiences of bringing payment of Class 2 National Insurance contributions (NICs) into Self Assessment.

Any self-employed individual can pay Class 2 NICs to be eligible for the pensions and benefits it covers. These include the State Pension, Contribution-based Employment and Support Allowance, Maternity Allowance, and Bereavement Support Payment.

Those whose profits reach the Small Profits Threshold (SPT) must pay Class 2 NICs, while those under the SPT can pay voluntarily. The SPT in the tax year 2021 to 2022 was £6,475.

From April 2015, the mechanism used by self-employed individuals to pay Class 2 NICs changed. Prior to this date, self-employed individuals paid Class 2 NICs either bi-annually or monthly by Direct Debit. Other liabilities including Income Tax and Class 4 NICs were paid through Self Assessment.

Following a recommendation by the Office of Tax Simplification in 2012, HMRC conducted a public consultation in 2013 about bringing payment of Class 2 NICs into Self Assessment. Responses were supportive of this proposal, resulting in HMRC introducing legislation in 2015 to bring this change into effect. The policy objective was to modernise the way Class 2 NICs are assessed and collected, making the system simpler, more straight-forward and reducing administrative burdens on self-employed individuals and HMRC.

2.2 Research aims

The aim of this research was to understand whether the mechanism change made it easier for self-employed individuals and tax agents to pay Class 2 NICs. It aimed to understand if the change had its desired impacts, including for self-employed individuals claiming Maternity Allowance.

There was a specific concern that self-employed individuals who had claimed Maternity Allowance under the old payment system may not have been aware of needing to go through additional processes to claim under the current system. These additional processes include needing to pay Class 2 NICs early to maintain eligibility at the point of making a claim. HMRC wanted to investigate whether the change in payments had any unforeseen impacts for those claiming Maternity Allowance.

The research therefore aimed to understand:

• how well self-employed individuals understood the current Self Assessment process, what NICs they pay and any impact on their benefit entitlement

• how aware self-employed individuals and agents were of the change itself, and how well the change was communicated by HMRC

• how easy or difficult paying Class 2 NICs has been for those claiming Maternity Allowance

• whether there have been any unintended consequences of the mechanism change, such as issues with compliance

• whether the mechanism change has simplified work for agents

2.3 Methodology

The research included 30 in-depth interviews with self-employed individuals and tax agents, each lasting around 45 minutes. Interviews were conducted via telephone or on Microsoft Teams and took place between January and March 2022.

Self-employed individuals who had specifically been self-employed and paying Class 2 NICs both before and after the change to the payment system were recruited to participate. Similarly, tax agents were recruited on the basis they had arranged payment of Class 2 NICs for their clients before and after the mechanism change.

Of the self-employed participants, five were individuals who had claimed Maternity Allowance both before and after the change to the payment system. This ensured that the research could investigate the specific experiences of those claiming Maternity Allowance and paying Class 2 NICs before and after the mechanism change, as well as any unintended consequences of this.

Additionally, quotas were set to ensure a good mix of eligible self-employed individuals and tax agents were included in the sample. The sample for self-employed individuals included primary quotas that were central to the research aims for this study, and secondary quotas that ensured a diversity of participants within the sample. The sample for tax agents included secondary quotas for ‘type of agent’ and ‘region’ to ensure some diversity in these variables. The final composition of the sample, including quotas, is outlined in Annex 1.

A qualitative approach was considered the most appropriate methodology for this research to explore the nuances and diversity of views and experiences. It can help to understand the factors which shape or underlie individuals’ circumstances and the situations in which views can change. The purpose of this research was to generate an in-depth understanding of participants’ experiences of paying Class 2 NICs under both payment systems.

As this was a qualitative study, the results are not representative of self-employed individuals and agents. The research instead used a purposive sampling approach, whereby key criteria were set and participants were recruited by specialist recruiters using a screening document. The sample for the research was sourced from HMRC’s Self Assessment data, and free-found from the general population.

2.4 How to read this report

Terminology such as ‘Maternity Allowance’ and ‘self-employed individuals’ has been written out in full in this report to ensure clarity. Please note that terminology has been abbreviated in the attributions for quotations. For example, ‘self-employed individuals’ is ‘SE individuals’, and Maternity Allowance is ‘MA’. Please see the Glossary and Abbreviations section on page 5 for more details of the terminology used in this report.

Verbatim comments have been included in this report to illustrate and highlight key points and common themes. Where verbatim quotes are used, they have been anonymised and attributed with the following characteristics:

• self-employed individuals: at/above or below SPT, use of tax agent, age band, location, whether they had claimed Maternity Allowance
• tax agents: location

Please note that two or more participants may have the same information in the attributions for their quotes.

3. Understanding of the two payment systems

This section explores self-employed individuals’ understanding of the two different payment systems, and their levels of awareness of the way that Class 2 NICs is currently paid. It also examines satisfaction with the current system, and experiences of payment via Self Assessment compared to those under the old system. The views of agents on their clients’ understanding of the systems are also discussed in this section.

3.1 Awareness of how Class 2 NICs is currently paid

Self-employed individuals were generally aware that they paid Class 2 NICs via Self Assessment. They understood that their Class 2 NICs payment was calculated and paid as part of their Self Assessment return.

“I just pay it along with my income tax now. It’s not very much to pay as I do not make much at the moment, it’s very simple to manage.” - Self-employed individual, below SPT, no tax agent, 46+, Scotland, did not claim Maternity Allowance.

Self-employed individuals were generally aware that they should pay Class 2 NICs in a single annual payment, and most reported doing so in January. However, their understanding of how they paid Class 2 NICs varied according to whether they had used a tax agent or not.

Self-employed individuals who did not use an agent typically demonstrated a clear understanding of how much they had to pay for Class 2 NICs and when. They were able to describe their routine for preparing for Self Assessment, and how they managed the Class 2 NICs element of their Self Assessment return.

“In my account there’s a section for NICs that I go to.” - Self-employed individual, below SPT, no tax agent, 36-45, England, claimed Maternity Allowance.

“Taxes aren’t overly complex for someone in my position, it’s easy enough to manage it myself and NICs is straightforward. I tick the box saying I want to pay and I pay.” - Self-employed individual, below SPT, no tax agent, 46+, England, did not claim Maternity Allowance.

By contrast, self-employed individuals who used a tax agent were happy not to know the details of paying Class 2 NICs. Self-employed individuals who used agents were not always aware of which part of their payment related to Class 2 NICs. This was especially the case where their agent had processed the payment on their behalf.

“I give [tax agent] all my stuff for the year; he checks and sends it to HMRC…I do a spreadsheet with my earnings and expenses, and at the end of the year he does it all for me.” - Self-employed individual, above SPT, uses tax agent, 46+, Scotland, did not claim Maternity Allowance.

For agents, providing information to their clients about the process was an important part of their service. Alongside completing tax returns and processing payments, they saw explaining to their clients why they should, or needed to, pay Class 2 NICs as a core part of their role.

“[Explaining the change to the payment system] is why clients pay us.” - Tax agent, Scotland

3.2 Satisfaction with the current system, compared to the old system

Self-employed individuals were broadly happy with using both systems to pay Class 2 NICs. They generally reported that the change from the old to the current system had not had a strong impact, either positively or negatively. They tended to express either neutral views about each system, saying that the change had no impact, or to have a slight preference for one system over the other.

Self-employed individuals with profits at or above the SPT were most likely to say that they preferred the current system, because they felt it was more efficient. It allowed them to meet all their tax obligations as part of Self Assessment.

“It’s better that it is all just lumped in as part of the tax bill. It’s not a lot of money. I don’t notice it really.” - Self-employed individual, above SPT, uses tax agent, 46+, England, did not claim Maternity Allowance.

Some lower income self-employed individuals felt that features of the old system made paying Class 2 NICs more manageable. The old system had enabled them to spread the cost of Class 2 NICs payments into smaller monthly payments over the course of the year. However, under the current system they were required to make one total payment at the end of the tax year via a Self Assessment return (see the Glossary for more details). Self-employed individuals with profits below the SPT tended to say they would prefer to pay monthly by Direct Debit after completing their Self Assessment return.

“January is a horrible time for tax… [paying Class 2 NICs] monthly you don’t notice it.” - Self-employed individual, below SPT, no tax agent, 46+, England, did not claim Maternity Allowance.

Lower income self-employed individuals also tended to prefer paying by Direct Debit under the old system, because it was more straightforward than paying via Self Assessment. They reported that, once they had set up a Direct Debit, they did not have to think about it further. Some lower income self-employed individuals felt paying Class 2 NICs through Self Assessment required more work from them, where under the old system they did not have to take any further action once they had set up the Direct Debit.

“My experience of [the Self Assessment] process is anxiety…there’s this thing looming over my head, the year’s coming to an end, and I have this thing to do.” - Self-employed individual, below SPT, no tax agent, 36-45, England, claimed Maternity Allowance.

Some lower income self-employed individuals were not confident about completing their Self Assessment tax return correctly. They were also worried that they would lose their pension and benefit eligibility by completing their Self Assessment return incorrectly.

“I’ve never been self-employed before…I assume that’s right [about requirements for paying Class 2 NICs]… I’m not overly au fait with it all.” - Self-employed individual, below SPT, no tax agent, 36-45, England, did not claim Maternity Allowance.

3.3 Agents’ views of the current system, compared to the old system

Agents were divided in their preferences between the two systems, seeing both the advantages and disadvantages of each. Agents tended to feel that the current system was more efficient, because they could process their clients’ overall tax return once. This in turn helped them to check the accuracy of the entries more easily.

“[With the Self Assessment form] you get to see everything in one place, how it all aligns, and you can spot any mistakes.” - Tax agent, Scotland

A further advantage of the current system was that self-employed clients were less likely to query why Class 2 NICs were separate from their overall tax return. Therefore, agents did not have to spend time explaining to clients why they had to pay it.

“People now just see tax and NICs all as one. They do not see them as separate any more [whereas they did under the old system].” - Tax agent, Scotland

Agents’ preferences for either system were also driven by the circumstances of their client base. Agents who had lower income clients felt they could more easily manage smaller monthly payments under the old system, than a single large payment under the current system.

“The only drawback, because you’re [paying Class 2 NICs] annually, for the clients [the old system] was more manageable.” - Tax agent, Scotland

4. Awareness and experience of the change to the payment mechanism

Section summary

This section explores self-employed individuals’ awareness and experience of the change to the payment system for Class 2 NICs. This is based on what they recall from the time the change occurred. It also covers tax agents’ experience of ensuring their clients understood the change to the payment system.

4.1 Awareness and understanding of the change to the payment system

Recollection of the change from the old payment system to the current system varied amongst self-employed individuals. Those who used a tax agent were generally only aware that the change had occurred, without knowing the details.

Among those who did not use a tax agent, there were some who were similarly unaware of the details of the change. However, there were also self-employed individuals who did not use a tax agent and reported that they understood what had changed between the two payment systems.

“I hadn’t realised I hadn’t been paying it [by Direct Debit] and then I checked my bank statement.” - Self-employed individual, below SPT, no tax agent, 46+, England, did not claim Maternity Allowance.

Some self-employed individuals reported that, although they were not immediately aware of the change to the payment system at the time, they had eventually become aware. The ways in which these participants became aware that the payment mechanism had changed included:

• noticing Direct Debit payments were no longer coming out of their accounts

• new questions covering Class 2 NICs on the Self Assessment return

• updates from tax agents at the end of the year (among those who used a tax agent)

These self-employed individuals thought that they may have been contacted by HMRC about the change to the payment system. However, they felt they had not appreciated what this change meant until they noticed that their Direct Debit payments had stopped. Despite not immediately being aware of the change, these participants recalled that this did not cause any issues with paying Class 2 NICs that year.

“[The change] made no difference to me whatsoever – payments were just to be made in a single payment rather than by direct debit four-weekly.” - Self-employed individual, below SPT, uses tax agent, 46+, Wales, did not claim Maternity Allowance.

Nevertheless, there was a sense among self-employed individuals that they appreciated clear information from HMRC about the fact that the change to the payment mechanism was happening, and what it meant for them. Among self-employed individuals who used a tax agent, some reported that around the time that the change happened, their tax agent explained the change and how this would apply to them.

Other self-employed individuals described finding out about the implications of the change through other sources, such as other self-employed individuals and looking online. They were reassured that they were still paying Class 2 NICs on time, and that they were still eligible for relevant pensions and benefits.

“I’m sure I got a letter from [HMRC], and then my accountant told me… I wasn’t concerned, I left it in my accountant’s hands.” - Self-employed individual, above SPT, uses a tax agent, 46+, Scotland, did not claim Maternity Allowance.

Tax agents also reported that their clients valued information on how the change to the payment system would affect them specifically. Clients wanted to be assured that they were still eligible for relevant pensions and benefits.

Tax agents recalled that, around the time of the change, an important part of their job was to provide this explanation and assurance to their clients. Tax agents felt this was a short-term issue and their clients were happy about the change once they understood how it would affect them.

“I would have explained ‘your Class 2 NICs is in [the Self Assessment] and it’s all done for you, so you don’t have to [do] the separate bit’… I don’t remember there ever being a problem with it [from clients].” - Tax agent, Scotland

4.2 Satisfaction with the information provided about the change

Self-employed individuals who considered themselves to be well-informed about how National Insurance work were satisfied with how the change to the payment system had been explained to them. These self-employed individuals included participants both at/above and below the SPT, as well as people who did and did not use a tax agent. These participants demonstrated confidence in understanding the change to the current payment system, because they understood what the changes would mean for them specifically.

“I am generally the sort of person who knows what’s going on with my finances. I was quite satisfied [with the information]. It was pretty straightforward. There was no difficulty in understanding it.” - Self-employed individual, below SPT, uses a tax agent, 46+, Wales, did not claim Maternity Allowance.

Some self-employed individuals who used a tax agent were engaged with communications from HMRC (and from their tax agent) about the change to the payment system. Others had little or no recollection of hearing from HMRC about the change. As with understanding the details of the change itself, these self-employed individuals were happy for their tax agents to handle changes to the payment system. They did not actively seek out explanations from their tax agent.

“It must have been my accountant or HMRC directly who said that Class 2 NICs would now be on your tax bill.” - Self-employed individual, above SPT, uses a tax agent, 46+, England, did not claim Maternity Allowance.

Some self-employed individuals were less informed about NICs and did not use a tax agent. They felt that the letter from HMRC about the change to the payment system was not helpful, as it did not explain how this would affect them specifically. These individuals felt that the communications they received from HMRC generally were not relevant to them. Therefore, they thought they would not have engaged with the letter about Class 2 NICs at the time.

Other self-employed individuals did engage more with the letter and recognised that the information was relevant to them. However, they felt frustrated that it was written in technical language and that it was unclear about how the change to the payment system related to their specific circumstances.

“If I did get anything about National Insurance, I would have thought ‘oh that’s OK I’m already paying National Insurance and [the letter] went in a file’.” - Self-employed individual, below SPT, no tax agent, 36 to 45, England, claimed Maternity Allowance.

5. Impacts of bringing Class 2 NICs into Self Assessment

This section explores the benefits and challenges of paying Class 2 NICs under the current system, and whether the change had its desired impacts, including for those who claimed Maternity Allowance.

5.1 Benefits of the current system

Self-employed individuals were generally satisfied with the current system for paying Class 2 NICs because they found it to be straightforward and efficient. Similarly, tax agents generally felt the current system was straightforward and were mostly confident in dealing with any queries that their clients may have had.

Self-employed individuals with profits at or above the SPT felt that Class 2 NICs payments were of manageable amounts for them to pay in one single payment. They were happy to have their Class 2 NICs bill included in their overall tax return. They felt it was more efficient to meet their tax obligations all in one go, rather than have a separate process for Class 2 NICs.

“The change has had no impact on how I manage my finances as I pay the bills as soon as they are due. I am able to meet my obligations comfortably.” - Self-employed individual, above SPT, uses a tax agent, 25-35, England, did not claim Maternity Allowance.

Self-employed individuals who felt they were confident in managing their own tax obligations also appreciated paying Class 2 NICs through Self Assessment. These self-employed individuals felt the current system gave them more certainty that they had met their tax obligations for the year. They therefore did not have to think about it again until the following year.

“I think I prefer paying it all off in one go, just knowing it’s done. Rather than paying it out through the year.” - Self-employed individual, above SPT, no tax agent, 46+, England, did not claim Maternity Allowance.

Self-employed individuals who used a tax agent generally did not have strong feelings about the current system for paying Class 2 NICs. As noted in section 4.1, they may only have had a general awareness that the payment system had changed.

They were happy for their tax agent to tell them how much they needed to pay and then they paid it. Those self-employed individuals who used a tax agent before the change did not feel the current system had led to any additional complications with how they pay their Class 2 NICs.

“I don’t do anything, the accountant does it. I am not aware of how much tax or National Insurance my bill relates to – I just pay it.” - Self-employed individual, above SPT, uses tax agent, 46+, England, did not claim Maternity Allowance.

5.2 Challenges using the current system

Some self-employed individuals faced challenges whilst paying their Class 2 NICs, particularly lower income self-employed individuals and those less confident using the internet.

Some lower income self-employed individuals found it more difficult to budget for a single annual payment compared to making smaller monthly payments via Direct Debit. This challenge was most significant for those self-employed individuals who did not have large reserves of cash to draw on to make large payments.

This challenge could be exacerbated by the timing of the payment falling in January, which some lower income self-employed individuals reported could be a challenging time financially. Some individuals had to fall back on savings to meet their tax obligations.

“I found the option for Direct Debit being taken away frustrating. I never had any issues and I thought it was easier than making payments through the website.” - Self-employed individual, below SPT, no agent, 46+, England, did not claim Maternity Allowance.

To help with this, some self-employed individuals with profits below the SPT felt they had to be more organised with their finances under the current system. This was to ensure they could meet their Class 2 NICs payments each year. For these self-employed individuals, bringing Class 2 NICs under Self Assessment had required them to pay more attention to paying it each year.

This was in contrast to the old system when they paid via Direct Debit each month with little notice. However, this did not ultimately prevent these self-employed individuals from paying their Class 2 NICs bill.

“I like to know the stage that I am at and to feel organised … so I try to keep on top of it as much as I can. I want to keep it as easy as possible with not too much financial pressure.” - Self-employed individual, below SPT, no agent, 46+, England, did not claim Maternity Allowance.

Tax agents felt there were still problems under the current system that affected clients’ ability to meet their tax obligations. This applied mostly to self-employed individuals under the SPT. Agents reported that lower-income individuals preferred the old system because making separate payments was more manageable than making one payment.

One agent in particular felt the current system put tax agents under pressure to process their clients’ Self Assessment returns all at one time in the year, instead of rolling monthly payments. Another agent commented on the difficulty of people moving from employment to self-employment under the current system. They believed the Direct Debit option to be much easier, as they could keep track of their clients’ finances.

“In the past, once they set up the direct debit it was gone, [self-employed individuals] didn’t have to do anything more. Now you have to keep bang up to date with it.” - Tax agent, England

Some self-employed individuals who did not feel confident using the internet preferred the old system because they found the online Self Assessment system challenging to access and complete. This challenge was not specific to the current system for paying Class 2 NICs. However, by bringing Class 2 NICs into Self Assessment, these self-employed individuals had found it more complicated to pay Class 2 NICs.

These participants reported challenges with logging into GOV.UK to complete their Self Assessment, alongside completing the return itself. Consequently, these participants relied on tax agents to process their Class 2 NICs payments. They were not confident they could do it themselves and were not aware they could complete a paper Self Assessment return.

“I found it difficult to log into my account online. This would make it easier to check how much I owe and when.” - Self-employed individual, above SPT, uses tax agent, 25-35, Wales, did not claim Maternity Allowance.

5.3 Claiming Maternity Allowance

As outlined in the Introduction, paying Class 2 NICs ensures self-employed individuals are eligible for State Pension and some benefits, including Maternity Allowance. This research included self-employed individuals who claimed Maternity Allowance both before and after the payment change for Class 2 NICs.

Self-employed individuals who had claimed Maternity Allowance under the old and current systems did not feel there were any issues in how they applied for Maternity Allowance under the current system.

“I don’t think [the application] took very long. I think I received a letter saying [HMRC] had received it and that was it. Done. It went ahead and it was accepted” - Self-employed individual, above SPT, no agent, 25-35, England, claimed Maternity Allowance.

Self-employed individuals who had claimed Maternity Allowance reported that the application process was as straightforward and seamless under the current system as it was under the old system. These individuals did not experience any complications with making a claim or had any concerns about their eligibility.

Self-employed individuals described how they did not experience any problems proving their eligibility for Maternity Allowance or accessing payments at the point they stopped working. Full details of the application process according to these self-employed individuals are available in Annex 2.

“I filled out another form to say exactly when I was going to finish work and then I got paid as soon as I finished… I never had any problems the whole time I was off work.” - Self-employed individual, above SPT, uses an agent, 36-45, England, claimed Maternity Allowance.

5.4 Ideas for improvements

To overcome the challenges to paying Class 2 NICs outlined in section 5.2, improvements to the system were suggested by self-employed individuals. These suggestions were thought to have the potential to make the payment process easier and more straightforward for future use.

Lower income self-employed individuals suggested more options for how to pay Class 2 NICs, such as a monthly Direct Debit. They felt this would make payments more manageable than a single annual payment.

“Make Direct Debit an option for those who prefer that system, not just disregarding it completely.” - Self-employed individual, below SPT, no agent, 46+, England, did not claim Maternity Allowance.

Some individuals did not feel confident processing their payment online and were anxious about filling in their Self Assessment return incorrectly. They also felt aspects of the online process could be improved to make it easier to use and more accessible.

It is worth noting that some of their specific suggested improvements are already in place. This includes features such as smartphone compatible websites, push notifications and eligibility quizzes to reassure individuals that Self Assessment is relevant to them. Initiatives such as an awareness raising campaign to make these features more visible could benefit those self-employed individuals who are not aware of these features.

Many self-employed individuals felt that communications about the tax system in general had improved over time. Nevertheless, some self-employed individuals felt there should be more support available for those who do not feel confident about their understanding of Class 2 NICs. Examples included the technical language used on the HMRC website and Self Assessment return. Additional guidance about Class 2 NICs could be targeted at self-employed individuals with a tax agent, particularly for those who want to feel more in control of their finances and understand what Class 2 NICs are used for.

Suggestions to help increase awareness and understanding about Class 2 NICs included more visual aspects to be included on GOV.UK, for example. The website could include more information, pop ups or affiliate websites so people can easily find the information that they need. This would help people who are uncertain about the purpose of Class 2 NICs. Additionally, more information about payments and eligibility would help individuals to feel confident about the stage they are at with paying their Class 2 NICs.

6. Conclusion

Most self-employed individuals felt that bringing Class 2 NICs into Self Assessment had a positive impact on how they paid Class 2 NICs.

Benefits of bringing Class 2 NICs into Self Assessment for self-employed individuals

Bringing Class 2 NICs into Self Assessment had worked well for self-employed individuals who:

• earn at or above the SPT

• were confident in managing their tax obligations

• were confident in accessing their Self Assessment online account

These self-employed individuals felt it made the payment process for Class 2 NICs more efficient and gave them greater control over meeting their overall tax obligations. For these self-employed individuals, paying Class 2 NICs under Self Assessment had become as routine as it was via Direct Debit under the old system.

The current system for paying Class 2 NICs also worked well for self-employed individuals who used a tax agent. They paid tax agents to process their Class 2 NICs payment through Self Assessment so they did not need to engage with it further.

Consequently, these self-employed individuals did not feel they needed to understand the tax system or changes such as bringing Class 2 NICs into Self Assessment. These self-employed individuals tended not to be aware of the details or implications of the change to the payment mechanism for Class 2 NICs. Nevertheless, they were not concerned about it because they were happy for their tax agent to handle it.

Challenges of bringing Class 2 NICs into Self Assessment for self-employed individuals

Bringing Class 2 NICs into Self Assessment had worked less well for lower income self-employed individuals and those who were not confident using the internet. Under the old system, these self-employed individuals were required to contact HMRC once to set up a Direct Debit to pay Class 2 NICs. After this initial set up, they did not need to take any further action and their Class 2 NICs payments were taken in small, manageable amounts.

Under the current system, these self-employed individuals are required to engage with HMRC once a year to complete their payment. Lower income self-employed individuals had generally adapted to paying Class 2 NICs through Self Assessment by organising their finances to ensure they can pay on time. For some lower income self-employed individuals, paying Class 2 NICs through Self Assessment had nevertheless been more stressful and required more work than paying under the old system.

Self-employed individuals who were less confident using the internet found it more difficult to pay Class 2 NICs through Self Assessment online. They cited problems with logging in to their Self Assessment online account on GOV.UK and a lack of certainty they had completed it properly. These self-employed individuals felt the old system for paying Class 2 NICs had worked better for them. Once they had set up a Direct Debit, they did not need to engage with the payment process again. After Class 2 NICs was brought into Self Assessment, they had had to use the Self Assessment system which they were unfamiliar with. In some instances, self-employed individuals had hired tax agents to process their Class 2 NICs payments, despite not needing one before the payment system changed.

Despite the additional complications around paying Class 2 NICs among specific self-employed individuals, the current system had not prevented them from paying Class 2 NICs. The change to the system also had not resulted in unintended consequences, such as issues with compliance, or eligibility for pensions and benefits.

Suggestions from self-employed individuals to improve the payment system for Class 2 NICs

Self-employed individuals made a range of suggestions for making the current system for paying Class 2 NICs more straightforward. These ideas focused on:

• providing more options for paying Class 2 NICs

• making guidance on completing the Self Assessment return more visible

• explaining the purpose of Class 2 NICs and the implications of not paying it

These suggestions reflect the importance that many self-employed individuals placed on having control over how they paid Class 2 NICs. They also reflect self-employed individuals’ need to understand the purpose of Class 2 NICs payments. In order to do this, self-employed individuals need to be equipped to complete their Self Assessment return confidently and to make payments that are manageable in their circumstances.

Doing so will help avoid situations such as:

• self-employed individuals relying on tax agents to process their Class 2 NICs payments

• self-employed individuals who earn under the SPT not paying Class 2 NICs voluntarily because they are not aware of the implications on their eligibility for related pensions and benefits

Annex 1

Participant sample

The final composition of the samples is outlined below.

Table 1: Self-employed individual sample composition - primary quotas

Criteria	Sub-categories	Number of participants
Small Profits Threshold (SPT)	At/above SPT	17
Small Profits Threshold (SPT)	Below SPT	8
Maternity Allowance	Claimed Maternity Allowance before and after mechanism change	5

Table 2: Self-employed individuals sample composition - secondary quotas

Criteria	Sub-categories	Number of participants
Tax agent use	Uses tax agent	8
Tax agent use	Does not use tax agent	17
Age band	25 to 35 years	5
Age band	36 to 45 years old	6
Age band	46 and over	14
Income band	Less than £6,475	7
Income band	£6,475 to £12,499	7
Income band	£12,500 to £29,999	5
Income band	£30,000 and over	6
Region	England	19
Region	Northern Ireland	1
Region	Scotland	2
Region	Wales	3

Table 3: Tax agent sample composition

Criteria	Sub-categories	Number of participants
Employment status	Self-employed	2
Employment status	Works for a firm	1
Employment status	Does both	2
Region	England	1
Region	Northern Ireland	1
Region	Scotland	3

The original sample design aimed to include 3 individuals with self-employed income of at least £50,000 or above and 1 tax agent based in Wales. Whilst the final sample composition covers a diverse range of participants, it was not possible to recruit participants in these groups due to time and budgetary constraints.

Annex 2

The process for claiming Maternity Allowance for self-employed individuals

Self-employed individuals who had claimed Maternity Allowance were asked to recall how they had applied for this. They were asked to outline the process both before and after the change to the payment mechanism for Class 2 NICs. This process is outlined below:

1. the self-employed individual receives a MAT B1 form from their midwife that confirms they are pregnant
2. the self-employed individual completes a Maternity Allowance application form (available to print from GOV.UK)
3. the application period begins, and the self-employed individual sends the application form and the letter from the midwife to DWP
4. DWP notifies the self-employed individual that they have received the application
5. DWP phones self-employed individual to verify details and contacts HMRC to set up the Maternity Allowance payments
6. the application period ends, and payments can start up to 11 weeks before the baby is due