Are you self-employed and wondering about National Insurance? Don’t worry, we’ve got you covered! Let’s dive into the world of National Insurance contributions (NIC). For those of you who’ve been around as long as I have, it used to be called “Stamp”.
But it no longer goes into a ring-fenced pot to support healthcare and social security. So, in my humble opinion, we should just merge it with Income Tax and stop pretending they’re two different things.
Who pays National Insurance?
First things first, if you’re self-employed, you (probably) need to pay NIC. But fear not, we’ll break it down for you. If once you’ve read this article and still have questions, head over to the Contact page and give our personal pax manager Mark Ferbert a call.
And don’t forget this is IN ADDITION to Income Tax. Hence you’ll see why accountants talk about tax rates of (say) 29% instead of the gov’t who refer to it as just 20%, conveniently forgetting about the 9% NI contributions you’ll make.
Oh, and for all this talk of “contributions”, please be under no illusion that this is voluntary. It’s just tax with a different name. Although we do have a few tricks up our sleeves to help you make the most of any allowances and exemptions.
If you’ve only got employment income, then you don’t pay Class 2 or 4 NIC. But, fear not, there’s a special class of NIC with your name on it (Class 1), and you’ll see the deductions on your payslip.
What’s with all these Classes?
Class 2 NIC is like a fixed weekly subscription, of around £3.50 per week. Some self-employed people are exempt, including those on a low income (below about £12.5K per year), and those under 16 or over state pension age. But otherwise, it’s the same amount regardless of your profits. You only pay less if you start or cease self-employment in the year.
Now, let’s talk about Class 4 NIC, which is based on your self-employed profits. Only if your profits exceed around £12,500 per year will you owe Class 4 NIC. Unlike Class 2, Class 4 is a percentage of your profits over £12.5K, so the more you earn, the more you contribute.
Although, like with Class 2, if you’re retired, under 16 or on a low income you won’t have to pay this either.
There’s also a Class 3. But that almost never applies. Call me if you’re worried it might.
What’s the damage?
Let’s look at Class 4 first, as this is the most ‘expensive’ one. Once your profits go over £12.5K, you’ll be asked to shell out 9% of all your profits above this point, until you earn more than £50K.
Beyond £50K, you’d surely expect the rate of NIC to increase. But here’s the odd thing. It doesn’t – it falls to just 2%.
So for example, if you make £50K, you’ll pay Class 4 NIC of about £3,370. But, earn £100K and your Class 4 bill won’t double. In fact, it’ll rise to ‘only’ £4,370. So that’s nice.
For Class 2, it’s simpler. A flat rate of about £185 per year, regardless of profits.
What if I have other income?
If you’re not just self-employed – perhaps you’ve also got a day job at the same time – then the interaction between different income sources gets quite interesting. You’ll already be paying NIC (Class 1, seeming as you asked…) through your employed role, so you might end up overpaying Class 4 if you’re not careful.
For example, if you have £50K self-employed income and £50K employed income, you’ll normally end up paying NIC at the higher rates in both jobs, and never getting to enjoy the 2% rate that you’d get if all £100K was from the same source.
You can bet HMRC aren’t going to help you on this, but the good news is, as part of our work in your year-end tax return, we’ll look at the NIC due on all your income sources and, if applicable, we’ll make sure you don’t pay more than you need to.
Should I pay NIC voluntarily?
Surely a ridiculous question! You’ve seen above how those with low profits get to escape paying NIC. Which is nice. Why would anyone pay something if they don’t have to???
Here’s why: Paying a full year of Class 2 NIC entitles you to a couple of things which you’d only otherwise get if you were employed. Namely, a state pension.
If your profits are below the £12.5K threshold, you don’t have to pay Class 2. But, you also don’t get a qualifying year for state pension purposes. Remember you need 35 qualifying years to get the full state pension.
However, here’s a weird twist: if your profits are between £6.7K and £12.5K, you don’t have to pay Class 2 but you STILL get credit for state pension as if you had. 💡
But, if your profits fall below £6.7K, then you have to shell out the Class 2 NIC if you want to get the pension benefits. This article isn’t the time to bash the morality of a tax system which required lower earners to pay more than higher ones to get the same benefit. But if you buy me a pint I’ll talk!
Of course, if this a side gig you might already have paid enough NIC in your day job to get the state pension credit anyway. Or, if you also received Child Benefit, that will count towards your state pension too.
Fear not – when we prepare your return, we’ll make sure you only pay Class 2 if it’s going to be beneficial to you.
How do I pay my NIC?
Paying your NIC is a breeze. Although Class 2 NIC is referred to as a “weekly” tax, that’s only to work out how much you pay. You don’t pay it weekly. That would be a real PITA.
Nope. You pay Class 2 and 4 annually through your Self Assessment Tax Return. This means that you don’t have to guess in advance what your profits are going to be, before working out if you need to pay it. We’ll collate everything at the end of the year and work out what’s best for you.
It’s added on top of your Income Tax and comes out as a single figure to send to the nice people at HMRC each January. And if you’re making payments on account, Class 4 is also included in these. But not, oddly, Class 2 🤷♂️