After a decade of additional tax and filing requirements for many landlords, including the annual tax on enveloped dwellings regime, the introduction of non-resident capital gains tax and the restriction on allowable interest expenses, some might say that they are due a bit of good news.
Whilst the national insurance contribution (NIC) position summarised in this article may not reduce their tax or compliance burden, it does provide a simple and cheap option for certain landlords to maintain an NIC record, which could enable them to obtain a state pension on retirement.
National insurance contributions
There are currently four main classes of NIC. Class 1 NIC is payable on employment income (for both the employee and employer) and class 4 NIC is payable on self-employed individuals’ profits. Therefore, the more you earn, the more NIC you pay under these classes.
Classes 2 and 3 are different in this respect. These are fixed weekly amounts of £3.15 and £15.85 respectively (based on 2022/23 rates). Class 2 NIC is an additional charge for individuals who carry out a trade, profession or vocation, whereas class 3 NIC is a voluntary contribution that can be made to maintain a NIC record.
As the class 3 charge is significantly higher than class 2 (presently £824 as opposed to £163 annually), it is understandable that taxpayers would rather incur class 2 NIC than class 3 NIC.
Impact on landlords
As mentioned above, class 2 NIC applies to individuals those who carry out a trade, profession or vocation, which is described in the legislation as being ‘gainfully employed’.
Whilst it is well established that property letting is not a trade for tax purposes, HMRC has confirmed that it is possible for a landlord to be ‘gainfully employed’ for the purposes of class 2 NIC.
In order for a property owner to meet this test, their property management activities must extend beyond those generally associated with being a landlord. It is not therefore enough for a landlord to undertake normal activities such as organising repairs, advertising for tenants, maintaining common areas and collecting rents. Instead, paying class 2 NIC will generally only be an option for landlords who are full-time, who own multiple properties and are actively looking to acquire further properties to let.
The impact of this is that, if a landlord does qualify as being ‘gainfully employed’, whilst they are not required to pay NIC (as they do not have trading profits), they are able to make voluntary class 2 NIC to maintain their record.
Therefore, for the right landlord, there can be an annual saving of £661 by paying class 2 NIC compared to paying class 3 NIC. Either of these contributions, being paid on a voluntary basis, provide the taxpayer with increasing entitlement to state benefits, potentially including a state pension at retirement.