Changes boost the
Self-employed
November’s Autumn Statement included some good news for the self-employed, with class 2 national insurance contributions (NICs) abolished in most cases, a cut to the main rate of class 4 NIC, the expansion of the cash basis for calculating trading profit and further relaxation of the Making Tax Digital (MTD) rules.
Class 2 NICs are currently paid at a flat weekly rate, and it is these contributions that give entitlement to contributory benefits, such as the State pension (35 qualifying years being required to receive a full pension). Until 6 April 2024 class 2 NICs are paid when profits are between £6,725 and £12,570, although NICs can be paid on a voluntarily basis if profits are lower.
Class 4 NICs are earnings-related. The main rate – currently 9% – is paid on profits between £12,570 and £50,270, with a rate of 2% on profits in excess of £50,270. For 2024/25, the main rate of class 4 NICs is to be reduced to 8%, representing a maximum saving of £377. The rate of 2% is unchanged.
The accruals basis is currently the default for calculating trading profit for sole traders and partnerships. From 2024/25, the cash basis will become the default, although the accruals basis will still be available for those who opt out of the cash basis. In line with this change, three restrictions that previously applied to the cash basis will be removed:
The cash basis removes complexities such as accruals and most capital allowances, though it will be unsuitable for some businesses, especially larger ones. Banks and other financial institutions may still insist on the accruals basis being used.
Making Tax Digital (MTD) for self-employed workers is due to be introduced from April 2026. The initial mandate will only apply to those with income of more than £50,000; those with income between £30,000 and £50,000 will be expected to join the scheme a year later. The government has committed to review the needs of smaller businesses – those with income under the £30,000 threshold – but any plans to incorporate smaller earners into the programme have been shelved for the foreseeable future.
There are also some reporting changes. Year-end reporting was originally going to consist of two separate steps, but there will now just be the one final declaration. Quarterly reports will become cumulative, so any errors will simply be corrected on the next report – rather than the previous requirement to resubmit past quarters. Guidance on training costs is to be clarified so that a deduction can be claimed for updating existing skills or maintaining pace with technological advances and changes in industry practices.