Low-income self-employed need to file Self Assessment tax returns to claim NIC credits

he Low Incomes Tax Reform Group (LITRG) welcomes the changes to National Insurance for the self-employed announced in today’s Spring Statement. The threshold for paying both Class 2 and Class 4 National Insurance contributions (NIC) will be fully aligned with the threshold for paying income tax from 2023/24 (£12,570), with 2022/23 being a transitional year. The Chancellor also announced that self-employed individuals earning above the Small Profits Threshold (£6,725 for 2022/23) will get National Insurance credits even if they do not earn enough to pay income tax or NIC. However, LITRG highlights that sole traders will need to declare their profits on a Self Assessment tax return to benefit from these credits.

Today’s announcement¹ includes some good news for the self-employed, with an increase in both the Class 2 and Class 4 NIC thresholds for the 2022/23 tax year. This means that, for 2022/23, Class 4 NIC will be charged only on profits above £11,908.² In addition, no Class 2 NIC will be payable if profits are below £11,908. However, if profits are between £6,725 and £11,908 then the self-employed will get National Insurance (NI) credits towards their state pension and some other benefits.

LITRG stresses that self-employed individuals who earn profits between £6,725 and £11,908 will need to be registered with HMRC for Self Assessment³ and submit a 2022/23 tax return to report their income to HMRC to get the Class 2 NI credits. 

Victoria Todd, Head of LITRG, said:

“We are concerned that some low income self-employed earners may see today’s headlines and think they no longer need to submit a tax return if they do not owe tax or NIC. This may be a costly mistake for affected taxpayers as they could miss out on contributions towards their NIC record.  

“In addition, we are aware that there is some confusion about whether there is a need to register for Self Assessment if profits are below the Class 2 NIC threshold. Although HMRC state that the self-employed should register if their turnover is above £1,000, the legislation is not clear on this point in every case.⁴ The change to the Class 2 NIC may compound this confusion and could result in some sole traders not registering with HMRC at all.  

“HMRC will need to ensure that taxpayers are aware of what actions they need to take so they don’t miss out on this important benefit. Clear guidance will therefore be essential.”