What sort of landlords pay Class 2 National Insurance Contributions (NICs)? HMRC have devised a simplistic approach to the problem: they place landlord activities as falling into three different 'tiers'. The only issue with such an approach is that neither tax legislation nor past case law reveals a three-tier test. 

Since 5 April 2015, a landlord has A liability to pay Class 2 NICs if they have ‘relevant profits' from a trade, profession or vocation. Previously, liability could arise if your profits arose from a 'business' too.

Both before and after 2015, a landlord who is able to demonstrate that their activities amount to a business is able to pay voluntary Class 2 NICs. This is a cheap way to build up credits for your State Pension in the absence of other earnings for NICs.

The old version of HMRC's National Insurance Manual (NIM) on page NIM74250 suggested that 'there are effectively three tiers of activity in relation to those undertaking investment-related activities...' Broadly, these are: 

  • Tier 1: 'the dabbler', a person whose activities in managing the property are those generally associated with being a landlord.
  • Tier 2: the gainfully self-employed (someone engaged in a business), someone managing a lot of properties and actively looking to buy more properties.
  • Tier 3: the landlord who passes the trade, profession or vocation test, e.g. someone running a B&B, Guest House or Hotel etc.

The new version of the NIM, updated in February 2023 is much more assertive. It makes it sound as if a three-tier test is some kind of official standard and it tells us:

  • NIM23800: "The position up to 5 April 2015, when Class 2 NICs was reformed, was that there were three tiers of activity".
  • NIM74250: "From 6 April 2015 there are still three tiers of activity in relation to those undertaking property or investment-related activities, however only those individuals who fall under tier three are liable to pay Class 2 NICs, subject to their profits levels."

The problem with this approach is that the new update is misleading: we know from the case precedents which have considered the nature of property letting that a landlord's activities cover 'a wide spectrum' of activities.

What are the basic rules?

1. Liability to pay

  • The liability to pay Class 2 NICs is a binary decision. Does the landlord earn profits from a trade, profession or vocation, for Class 4 NICs purposes or not?
  • To answer this we need to fall back on tax basics; is there a trade? Perhaps consider the nine Badges of Trade set out by the courts.

2. Can I make a voluntary payment?

  • The ability to pay voluntary Class 2 NICs or not, is also a binary decision. Are the landlord's activities active and enough to be described as a business or not?
  • Working this out is more complicated. In order to make this decision we need to consider:
    • How active is the landlord in managing the property(ies), or are they just a passive investor?
    • Are the activities in managing the property those generally associated with being a landlord? HMRC suggests:
      • Undertaking or arranging for external and internal repairs.
      • Preparing the property between lets.
      • Advertising for tenants and arranging tenancy agreements.
      • Generally maintaining common areas in multi-occupancy properties.
      • Collecting rents.
    • Or, are there any extra activities involved e.g.

A key question to be asked is 'How active do you need to be to be a business for Class 2 NICs?'

The old version of HMRC's NIM23800 was surely based on the 2002 case of Rashid v Garcia  (HMIT) SpC 348. Mr Rashid wanted to pay Class 2 NICs to ensure that he had access to his full State Pension and he claimed that he was a self-employed earner running a rental business. The Special Commissioner found that his four rental properties comprised an investment activity however, his activities undertaken as a landlord were not active enough to constitute a business. If you are trying to work through this decision against HMRC's tier system, he would have fallen into HMRC's pre-2015 'Tier 1': a 'dabbler'.

The question of what makes it a business is a familiar one for Inheritance Tax (IHT) Business Property Relief (BPR).

In Martin v IRC [1995] STC (SCD) 5, the Special Commissioner adopted a three-fold classification of investment business activities: they comprise 'making' the investments, such as finding tenants, negotiating rent, granting leases etc. 'Compliance activities', which the property owner has to carry out as landlord under the leases and  'Management activities', such as organising repairs and maintenance of the exterior of the buildings and the common parts, ensuring compliance by tenants with the terms of their leases and dealing with tenants’ complaints.

The Court of Appeal in Wakefield College v HMRC [2018] EWCA Civ 952, used a different two-stage test to consider the existence of a business for VAT purposes.

For IHT, the leading authority on the subject, comes from the decision of a two-judge Court of Appeal (Hale and Carnwath LJJ, as they then were) in IRC v George [2003] EWCA Civ 1763, [2004] STC 147 who preferred the 'spectrum approach' outlined by Dr Avery Jones in Stedman’s Executors v IRC [2002] STC (SCD) 358) at paragraph 12:

“It is not in dispute that the company carries on a business; the question is whether it is a business consisting mainly of holding or making investments. There is a spectrum at one end of which is the exploitation of land by granting a tenancy coupled with sufficient activity to make it a business, which may be activity in granting tenancies rather than activity in relation to the tenancy once granted. At the other end of the spectrum, while land is still being exploited, the element of services means that there is a trade, such as running a hotel, or a shop from premises owned by the trader. Normally for income tax, leaving aside services for which a separate charge is made, the income must be either income from land or trading profits.


It's optimistic to nail down all landlord activity into a three-tier test when the courts certainly prefer to consider 'the spectrum of activities' approach. If you are desperate to shoehorn a landlord into a category there are broadly speaking more like at least five basic types of landlord: 

  1. Passive landlords: lets out property on long lets, does minimal maintenance, provides no services.
  2. Active landlords: lets out on short lets, activities are those normally associated with landlords, may include low-scale activities in Furnished Holiday Lettings (FHL) or Airbnb.
  3. Business landlord: regards, letting as their main or one of their main businesses, lets out multiple properties, activities in excess of those normally associated with landlords, may be active in looking for new properties, may include FHL or Airbnb 'superhosts'.
  4. Mixed trade/business landlords: landlords who are earning Profits from dealing in or developing land and combining property dealing with rentals, or combining rental with trading activities.
  5. Trading landlords: activities include hotels and guesthouses, dealing and developing land for rental and sale.

If you meet the test to be running a business, our 'business landlord' you can pay voluntary Class 2 NICs: that can be a good way to qualify for your State pension.

Useful guides on this topic

National Insurance for landlords
When are National Insurance Contributions (NICs) payable by landlords? Can landlords pay Class 2 NICs voluntarily?

National Insurance: What's the maximum payable?
How are National Insurance Contributions (NICs) limited? What is the maximum payable? What different rules apply to employment and self-employment income? 

Badges of Trade: Are you trading or not?
Are you trading, running a business, or just buying and selling investments? The 'Badges of Trade' are a set of indicators, built up over time by the courts, to decide when an activity is a trading or investment activity.

Adviser's Guide: Property Business, profits and losses
What is property income? How is it taxed? How are profits calculated? How are losses relieved? Is NI paid on property income? Is property income classed as a business activity?

Property profits & losses: Toolkit (2022-23)
Our Property profits & losses toolkit takes HMRC's version and adds a great deal more information about what you can claim as an individual.

Furnished Holiday Letting? Start here
What is Furnished Holiday Letting? How do you qualify for Furnished Holiday Letting? What are the rules for Furnished Holiday Letting?

Airbnb: Tax Overview
What expenses can Airbnb owners claim for tax purposes? How is income taxed? Can you claim Rent-a-Room Relief? How does it affect Private Residence Relief? What are the VAT rules? 

External links

NIM74250 - Class 2 National Insurance contributions: special cases: property and investment income

NIM23800 - Special cases: property and investment income for Class 2 National Insurance contributions (prior to 6 April 2015)

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