As a landlord, understanding the ins and outs of National Insurance (NI) contributions can be crucial to your financial planning. If you have a property business, paying voluntary Class 2 NICs can help build entitlement to the state pension and other state benefits, and provide peace of mind for your future.
When NI Contributions for Landlords are Payable
To determine whether NI contributions are payable, HMRC applies a test that considers whether liability is due. Generally, Class 2 NI contributions are payable if you are gainfully employed in Great Britain in a trade, business, profession, office, or vocation, you are not an employee, and your trading profits are at least equal to the small profits threshold.
The small profits threshold is currently £6,725 for 2022-23. If you earn below this threshold, you are not required to pay Class 2 NICs. However, if your trading profits exceed this amount, you may be liable to pay Class 2 NICs.
HMRC’s Approach
HMRC’s approach to NI contributions for landlords places them in three tiers based on their property or investment-related activities.
First Tier
The first tier of landlords is described as ‘the dabbler’. This refers to an individual whose property management activities align with those typically associated with being a landlord. They may collect rent, carry out or arrange repairs, advertise the property, and handle tenant queries.
Second Tier
The second tier of landlords are those that are gainfully self-employed, someone managing a lot of properties, and that are actively looking to buy more properties. They may be considered to be operating a property business rather than simply managing a rental property.
Third Tier
The third and final tier consists of those landlords who pass the trade, profession, or vocation test. For example, someone running a B&B, guest house, or hotel may be considered to be operating a trade, profession, or vocation rather than simply managing a rental property.
HMRC considers that the usual activities of a landlord such as carrying out or arranging repairs, advertising, collecting rents, etc., are not sufficient to be considered potentially liable for NI contributions. The crucial thing to remember is that typically, only individuals categorized by HMRC under tier three are responsible for paying Class 2 NI contributions. Nevertheless, if property management activities go beyond those commonly associated with being a landlord, it is feasible to fall under the Class 2 NI contributions scope. If it does, this would allow voluntary Class 2 NICs to be paid, thus building up entitlement to the state pension and other state benefits, at a relatively low cost.
Voluntary Contributions
Where there are gaps in your NI record, voluntary NICs can be paid to obtain a higher State Pension entitlement or entitlement to other state benefits. Typically, this might affect you if you are aged between 45 and 60 years and therefore close to retirement age.
Voluntary contributions can usually only be paid for the past six years: this means that gaps for the tax year 2016-17 must be made up by 5 April 2023. However, the government has recently extended the voluntary National Insurance contribution deadline to 31 July 2023. This provides you with more time to fill gaps in your records to maximize your future State Pension benefits.
Transitional Arrangements
The transitional arrangements ending on 31 July 2023, enable you to make voluntary NIC contributions as far back as 2006, rather than the usual six years. After this date, the opportunity to pay voluntary contributions for gaps in NIC records between April 2006 and April 2016 will be lost. This makes it important for landlords to take action and consider paying voluntary NICs before the deadline to ensure they are maximizing their future state pension benefits.
It is also worth noting that voluntary contributions can be paid even if you are still working and making regular National Insurance contributions. This can be useful if you have gaps in your record from previous years where you were not working or paying contributions.
State Benefits
In addition to building up entitlement to the state pension, paying Class 2 NICs can also provide access to other state benefits, such as maternity allowance, bereavement benefits, and contribution-based jobseeker’s allowance. This can provide financial support in times of need and make it easier to manage your finances as a landlord.
Record Keeping
It is important to keep accurate records of your property business activities and profits to ensure that you are paying the correct amount of National Insurance contributions. If you are unsure whether you need to pay Class 2 NICs, it is always best to seek advice from a qualified accountant or tax professional.
Conclusion
National Insurance contributions for landlords can be a complex topic, but understanding the rules and regulations can help you make informed decisions about your finances and plan for your future. By paying voluntary Class 2 NICs, you can build entitlement to the state pension and other state benefits, and ensure that you are prepared for whatever the future may bring.
Southside Accountants Wimbledon can advise on NI liability, record keeping, and paying voluntary contributions to maximize future state pension benefits before the extended deadline of 31 July 2023.
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