Tax & Admin

A quick guide to Class 4 National Insurance

Allison S Robinson | 2 November 2021 | 2 years ago

class 4 national insurance

National Insurance is a compulsory contribution that employers and employees make to the UK government. It helps to pay for the NHS, social care, pensions and various other parts of the welfare system. Employers, employees, and self-employed people all need to pay National Insurance but each group has different NI classes which apply to them.

If you are self-employed, the two NI classes that may apply to you are Class 2 and Class 4, with Class 4 being particularly important. The process of paying National Insurance Contributions (NICs) is often more complicated for self-employed people than for those in traditional employment because they are self-assessed.

To help make the process easier and ensure you don’t get into any legal trouble for unpaid NICs, this article will explain everything you need to know about Class 4 National Insurance.

What is National Insurance?

National Insurance is a form of tax that is paid by both employers and employees to the UK government. To be eligible for making NICs, you must be over sixteen, below the national retirement age and earn above the minimum threshold (explained in detail below).

National Insurance is used for funding various parts of society and the welfare system, including:

  • The National Health Service
  • Social Care Services
  • Jobseekers Allowance
  • Employment and Support Allowance
  • State Pension
  • Winter Fuel Payments and Cold Weather Payments
  • Local Authorities Social
  • Disability Allowance

National Insurance for people in standard employment

Employees make NICs through their employer who pays class one NICs on their behalf. Employers must also pay employers’ NI contributions every time they pay an employee’s salary. Employees are responsible for paying their own national insurance but this is collected via payroll so it is taken directly from their pay before they receive their salary.

As of October 2021, the rate for National Insurance rate for those in standard employment is 12% for everyone who earns between £184 and £967 a week. There is an extra 2% for any earning above £967. From April 2022 these rates will increase by 1.25%.

National Insurance for self-employed people

National insurance works differently for self-employed people because their earnings do not usually go through payroll so it is not possible for the government to automatically deduct their NICs. This means that payments must be self-assessed and paid at the same time as other taxes. It is extremely important that everyone in self-employment does this on time and without error. If it is found that you have omitted something from a self-assessment form, you could be accused of tax avoidance which can have serious potential legal and financial ramifications.

Class 4 National Insurance

Class 4 National Insurance must be paid at a rate of 9% for all people in self-employment who earn profits of between £9,568 and £50,270 per year. For additional profits above £50,270, the NICs must be paid at a rate of 2%. Those people whose profits are below the minimum threshold do not have to pay any Class 4 NICs.

3 examples of Class 4 NI calculations

  1. John earns £8,000 profit per year from his freelance writing job. As his profits are below the minimum threshold, he is not required to pay Class 4 NICs though he will be eligible for Class 2 NICs (see below).
  2. Paul earns £15,000 profit per year from his musical instrument shop. For the first £9,568 profit, Paul is exempt from paying Class 4 NICs. For the additional £5,432 profit, Paul is eligible to pay NICs of 9% meaning his annual contributions will be £488.88.
  3. George earns £100,000 profit from his home decorating business. His first £9,568 is exempt from Class 4 NICs.He then pays 9% on all profits between £9,568 and £50,270 (£40,702 x 0.09=£3,663,18), and 2% on all profits above £50,270 (£49,730 x 0.02=£994.60). This means George is eligible for annual Class 4 NICs of £4657.78.

Class 2 National Insurance

The other type of National Insurance that affects self-employed people is Class 2 NI which applies to all those with profits of more than £6,515 a year. If you earn below that, you do not need to pay anything, but you may choose to make voluntary NICs if you want to fill any gaps in your contribution history. Class 2 NICs are a nominal payment with everyone eligible only required to pay £3.05 per week.

Why do some people make voluntary NI payments?

People who do not have a full contribution history may find it difficult to claim some state benefits. This means that they may be unable to get job seekers allowance, access NHS services, or get the full state pension. This can be a huge issue and mean that people who need extra help and support can fall through the cracks.

To help plug any gaps in NICs, people can make voluntary payments in times when they are in a good financial position. This means that they will be able to get the assistance they need in difficult moments and claim the pension that they have earned over years of hard work.

How to register for National Insurance when self-employed

Registering for National Insurance is not difficult, and needs to be done as soon as you begin self-employment.

First, you need to register for a Self Assessment tax return using your national insurance number. This is done through HMRC’s website and only takes a few minutes. You will then be given an online account where you can manage your taxes, update your personal details, view returns that have been filed by others on your behalf, make payments of taxes due and so on.

Once you have been registered for Self Assessment, you are able to complete the process of registering for National Insurance as well as paying any tax owed or making voluntary contributions if necessary.

Self Assessment deadline

When do you pay self assessment NICs?

Self Assessment is an annual tax return that all self-employed people must complete every year. It takes into account your yearly profit, any expenses you may have incurred for your business, as well as any voluntary payments you have made. This means that at the end of each tax year, it will be clear how much you need to pay in NICs based on what you made during the last 12 months. You will need to follow the rates explained above on all profits without leaving anything out. You will need to file your return and pay your NICs before January 31st to avoid fines and other potential legal and financial penalties.

Is Class 2 National Insurance being abolished?

In 2018, the UK government announced its intention to abolish Class 2 NICs altogether. This was part of its plans to simplify the tax system and make it easier for self-employed people to pay. However, since this announcement, people are still waiting for Class 2 NICs to be scrapped.

Who is exempt from paying National Insurance contributions?

There are many groups of people who are exempt from making NI contributions. If you are employed, have a company pension or an auto-enrolled workplace pension then your employer will pay Class I and Class II NICs on your behalf (and deduct them automatically).

Some examples of those who do not need to make NICs include:

  • People who don’t meet the minimum salary or profit requirements
  • Those under the age of sixteen or above the age of 66 (UK national retirement age)
  • Those with disabilities that mean they cannot work
  • People receiving Job Seekers Allowance
  • Those on statutory maternity, paternity and adoption pay
  • Volunteers in the UK’s armed forces, emergency services and NHS ambulance service.
  • Anyone who is in prison

What are the benefits of National Insurance?

National Insurance contributions play a key role in funding many important state benefits, including:

  • The Basic State Pension – The full pension is £179.60 per week for people who pay Class I NICs (those in traditional employment), but the amount you will get depends on your contributions. You can also build up extra money through additional state pension contributions that people make themselves during their working life. This will be paid as an additional amount after reaching retirement age.
  • Statutory Sick Pay – This gives employees some regular income while off work due to illness or injury
  • Statutory Maternity Pay – For women who are off work for six weeks after giving birth, this pays 90% of their average weekly earnings before tax
  • Statutory Paternity Pay – For fathers or the partner of a woman who gives birth, paternity pay is also 90% of their average weekly earnings before tax
  • Maternity Allowance – This provides financial support to some women if they meet certain criteria and have stopped working in order to care for a child up until that child has reached 12 months old. It can be claimed by either parent as long as one meets those conditions.
  • Bereavement Benefits/Widowed Parent’s Allowance– These provide income for people whose spouse or civil partner dies
  • Job Seeker’s Allowance – This provides financial support for people who are unemployed and looking for work. It is paid to those between the ages of 16 and 65 with a certain level of savings or other income, depending on their circumstances. You can also get it if you have just left your job voluntarily or have been made redundant but do not have another job lined up yet.
  • The NHS – All medical treatment you receive through the UK’s National Health Service is free at the point of use. There is no charge for going to see your GP or nurse, being admitted to hospital as an inpatient or receiving any kind of surgery or medication.

When did National Insurance begin?

National Insurance contributions were first introduced in 1911 by the then Chancellor of Exchequer, Lloyd George. Back then they were just known as “contributions” and not “National Insurance”. The scheme was set up to provide benefits for unemployed people who had lost their jobs due to illness or injury, but it soon became clear that extra revenue would need to be raised through taxation if these state benefits were going to continue being offered.

When National Insurance began it was unpopular with both employers and employees. Lloyd George tried to sell it to workers with the slogan “Ninepence for fourpence”, fourpence being the amount the employee paid and the rest being that paid by their employer and the state. Many working-class people felt that they were better off with the money in their pockets now than in the future if they fell into hard times.

The Formation of the NHS

The formation of the NHS

It was the formation of the NHS in 1948 that really changed people’s perceptions of the importance of National Insurance. The brainchild of then-Minister for Health Aneurin Bevan, healthcare became free for every British citizen at the point of contact. Many countries do not have a national health service and so their citizens either have to pay for private health insurance or for the full cost of treatment.

The history of National Insurance contribution rates

There have been various increases to NIC rates in the hundred or so years since National Insurance was first introduced, with the latest (at time of writing) in September 2021 causing enormous controversy. This was because the raise broke a manifesto pledge by the Conservative Party under Boris Johnson who had promised not to raise NICs before the 2019 election.

Johnson and Chancellor Rishi Sunak explained the decision as being necessary for clearing the NHS backlog created by Covid-19 and pre-pandemic austerity and cuts, and for social care reform. Despite this, many people felt the increase was unfair and would disproportionately affect the young and the poor at a time when many were already struggling. From 2022, NIC rates across the board will increase by 2%.

Final thoughts

National Insurance is a valuable source of revenue for the government. It means that they can provide state benefits to people who need them, and help ensure everyone is healthy and looked after through the NHS and State Pension. If you are self-employed, make sure you are registered for Self Assessment and you know exactly how much you need to pay in Class 4 National Insurance Contributions to avoid any potential fines or penalties.

Related Topics

Financial Planning for Small Business Owners
11 September 2023

Financial Planning for Small Business Owners

Read More →
Embracing Sustainability: Eco-Friendly Practices for Businesses
1 September 2023

Embracing Sustainability: Eco-Friendly Practices for Businesses

Read More →
Maximising Productivity: Time Management Hacks for Entrepreneurs
16 August 2023

Maximising Productivity: Time Management Hacks for Entrepreneurs

Read More →
What is Debt Financing?
14 August 2023

What is Debt Financing?

Read More →
What is Straight Line Depreciation and Why is it Important?
11 August 2023

What is Straight Line Depreciation and Why is it Important?

Read More →
Which Employee Benefits Are Tax Free?
10 August 2023

Which Employee Benefits Are Tax Free?

Read More →

If you enjoy reading our articles,
why not sign up for our newsletter?

We commit to just delivering high-quality material that is specially crafted for our audience.

Join Our Newsletter