National Insurance Rates for the Self Employed Explained

National Insurance was introduced in 1911 and greatly expanded after the Second World War to provide insurance against illness and unemployment. Since then it has widened to encompass benefits more generally, such as a pension or maternity leave. Workers can pay contributions from the age of 16 and it’s worthwhile to ensure you have contributed into the system throughout your working life so that you can receive benefits as and when you might need them later.

When you’re employed, your National Insurance Contributions (NICs) are deducted through the Pay As You Earn (PAYE) system. But when you’re self-employed, or if you do some extra self-employed work alongside your main job, you’ll need to make the payment directly and ensure it is listed correctly on your self-assessment tax return.

The self-employment calculation is done partly through a fixed weekly or monthly payment and partly as a percentage of net profits above a threshold.

There are various classes of National Insurance but two in particular relate to self-employment.

  • Class 2

These are calculated at a flat weekly rate for each week, or part of a week, that you are self-employed during the tax year. They are due on trading profits but two thresholds come into account at lower levels of income:

  • If a self-employed individual has profits below the “Lower Profits Threshold” (LPT), they are not liable to pay Class 2 NICs.
  • There is then a level below that, the “Small Profits Threshold” (SPT), and if the person is above it but below the LPT, then the individual is credited with Class 2 contributions (as if Class 2 had been paid) in order to preserve their state benefit and pension rights.
  • If you fall below the SPT then the contributions are voluntary. It might still be useful to pay these in order to ensure you qualify for the relevant future benefits.

If your profits are above the LPT then you also pay Class 4.

  • Class 4

These are calculated as a proportion of your profits based on two thresholds, the Lower Profits Limit (LPL) and Upper Profits Limit (UPL):

  • Below the LPL, no Class 4 NICs are due
  • Between the LPL and UPL, the Class 4 NICs are usually around 9% of those profits
  • Above the UPL, the Class 4 NICs are usually around 2% of those profits

The government periodically adjusts the rate of NICs and the thresholds as it tries to balance the books and incentivise growth.

Class 4 contributions do not count towards any benefits, including the State Pension, as people who are self-employed can qualify from their Class 2 contributions.

There is also Class 3 voluntary contributions that anyone can make. This is something you might consider if you fall below the thresholds described above or if you have any gaps in your NIC contribution history for any reason, such as living abroad or if you were unemployed and not claiming benefits. This will help to ensure that you have made enough contributions to receive the full state pension.

How do you pay NICs?

Most people pay the contributions as part of their Self Assessment tax bill. Like many other elements of your self-assessment tax return, National Insurance contributions can be confusing. It is important to get your National Insurance contributions right, so you receive the full benefits, like adding to your pension fund.

There are some exceptions to paying Class 2 contributions through the Self Assessment Tax Return process, such as if you are a minister of religion who doesn’t receive a salary or stipend, or if you’re a non-UK resident who is self-employed in the UK. There is a full list of these exceptions on the UK Government website, www.gov.uk.

If all this sounds confusing then rest assured that our accountants provide expert advice on how to optimise your National Insurance payments. Call us today at Kench & Co Chartered Accountants on 01491 578207 to book a consultation.

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