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
Employment and Support Allowance
Winter Fuel Payments and Cold Weather Payments
Local Authorities Social
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
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).
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.
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.
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?