In the UK, National Insurance Contribution (NIC) is a tax deduction taken from earnings to fund important systems like sick pay, parental leave, state pensions and of course, the NHS.
Before 1975, everyone paid a flat rate of National Insurance. Now, it’s a bit more of a complex equation based on how much you earn and what kind of work you do.
For employed people who are paid through PAYE, National Insurance isn’t a worry because it is automatically calculated and removed from your wages. Reading your paycheck each month might have stung, but the stress of working out what you owe is gone.
However, If you’re self-employed, you don’t pay yourself through PAYE. This means that it’s your responsibility to calculate and settle the right amount for your contribution.
But before you get overwhelmed by math and taxes (the horror!), we’ll make this process as easy as possible with our ultimate guide for NIC for the self-employed.
What national insurance am I liable to pay?
Everyone in the UK must pay National Insurance contributions on their earnings from the age of 16 right up until they retire – unless they hit certain exemption requirements.
For example, those earning below the primary threshold (£242 a week for the 2023/2024 tax year) don’t have to pay National Insurance. There are also some situations where you might pay reduced rates, such as married women and widows who opted into the Reduced Rate Scheme before April 1977. These people are exempt from paying Class 2 NICs but still have to pay Class 4 as normal.
If you’re self-employed and you earn more than the primary threshold (i.e. £242 a week in 2023) you will be liable to pay both Class 2 and Class 4 National Insurance contributions. In addition, you might want to pay Class 3 contributions voluntarily, which we’ll cover later in this guide.
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What are the different classes of National Insurance contributions?
If you’re self-employed, you must pay Class 2 and 4 National Insurance contributions. But what exactly are these classes? Let us explain.
Class 1 NIC
Class 1 National Insurance are contributions from employees of a company, who get paid through PAYE. This type of contribution is automatically calculated based on your wages and deducted from your paycheck, so you rarely need to worry about it.
If you’re self-employed and working part-time as an employee, you will also be liable to paying Class 1 national insurance in addition to the Class 2 and 4 contributions you make during your self-assessment tax return. Sorry, no free pass for the self-employed here.
Class 2 NIC
This refers to a flat-rate NIC for self-employed people who make profits above the Lower Profits Limit. In the 2023/24 tax year, the Lower Profits Limit was £12,570.
So, any self-employed person earning over this amount was liable to pay a flat rate of £3.45 a week, or £179.40 for the full tax year. No matter what business you’re in or how much you make over this limit – every self-employed person pays the same Class 2 NIC.
Class 3 NIC is a voluntary contribution you can make if you don’t currently pay National Insurance Contributions. For example, if your profits are below the Lower Profits Limit, rather than paying Class 2 NIC, you can choose to pay Class 3.
Voluntary contributions help fill in any gaps in your records, helping you earn a higher state pension when it’s time to retire. This is because to claim a state pension (for men born 6 April 1951 or women born before 6 April 1953), you need to have 35 qualifying years of NIC.
Any gaps in your record will result in a lower state pension. So if this is your goal, voluntary Class 3 contributions are the way to go.
Even if you don’t qualify for a state pension, there are several benefits that are also linked to National Insurance contributions, such as Jobseeker’s Allowance (JSA), Employment and Support Allowance (ESA), State maternity allowances, bereavement or incapacity benefits.
You can find out if you have any gaps in your NI and if you’re eligible to make voluntary contributions on the Gov.UK website.
Finally, Class 4 National Insurance is a payable rate by self-employed people based on their income. For example, for the 2023/24 tax year:
- Any income under £12,570 annually did not have to pay Class 4. This works in the same way that a personal tax-free allowance works for income tax.
- Income between £12,570 and £50,270 is charged at a higher rate of 9%.
- While any other profits over £50,270 is charged at just a 2% rate.
The exact amount depends on the tax year itself (with both rates and brackets subject to change) and the profits that you earn. The more you earn, the more National Insurance you will be liable to pay.
How much is the National Insurance Contribution for self-employed?
The exact amount of National Insurance contributions you have to make when you are self-employed depends on many factors, mainly the amount of profit that you make during the tax year.
So, to help you get an idea, we’ll go through a real example. Please note the below example is based on the rates for the 2023/24 tax year. These rates and allowances are subject to change, so you should always check the GOV.UK website for the most up-to-date rates.
Melody is a self-employed dance instructor. For the 2023/24 tax year, she made £40,000 in profit. Because she’s self-employed, Melody is liable to pay both Class 2 and Class 4 NIC.
- Class 2 contributions are a fixed rate of £3.45 per week for the tax year. Melody has been operating her self-employed business for the full year, paying a flat rate of £179.40.
- Class 4 contributions are based on her profits. The first £12,570 of which Melody doesn’t pay any contributions. However, she’s charged a 9% rate for the remaining £27430. That equates to £2468.70
- In total, Melody needs to pay £2648.1 for the 23/24 tax year.
Instead of being deducted through her wages (as Melody can’t pay herself through PAYE), this amount is paid when she submits a self-assessment.
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How to complete your self-assessment
The first step to completing your self-assessment return is ensuring you’re registered as self-employed on the GOV.UK website.
Once you’re registered, you just need to complete and file the self-assessment online through the HMCR website before the deadline. To complete this form, you will need information such as your expenses, your income (from all sources) and any contributions you’ve made to pensions or charities.
You’ll also need your ten-digit Unique Taxpayer Reference (UTR) and National Insurance number to hand – so keep those digits handy before you start the process!
Although it may seem daunting, rest assured it’s less intense than submitting an annual return as the director of a limited company – and one of the benefits of being a sole trader over a limited company!
Now, let’s quickly run over the key sections involved in a self-assessment tax return and what information you need to enter.
Firstly, you need to declare the income you’ve made over the tax year. This also includes any interest earned from bank and building society accounts, as well as any dividends from shares you might hold.
Pensions, annuities and benefits
This section is only used if you are currently retired or claiming benefits. Here, you’ll list the amount from state pensions or other pension sums you’ve received or are entitled to, as well as any taxable benefits (i.e. bereavement allowance, carer’s allowance or jobseekers allowance) over the past year.
This section only applies to taxable benefits. If you’re receiving other non-taxable allowances, you don’t need to list them here.
Other UK income
This is the place to list income sources not included in the first section. This is also where you can list any allowable expenses and any income tax you might have already paid on them.
As it says on a tin, this covers any pension contributions you’ve made over the past year.
In this section, you should list the total of any Gift Aid donations made to charities, as well as any shares, securities, land or buildings gifted to charities.
Most of the other sections are pretty self-explanatory – but it’s always worth making sure you speak to an accountant for help.
To make self-assessments a breeze and keep an accurate track of your profits and expenses, we’d always recommend investing in accounting software to keep your books up to date.
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What happens if I miss the self-assessment deadline?
Self-assessment tax returns are usually due by the end of January. If you miss the deadline, you can receive a fine from the HMRC of £100 for a three-month delay, which increases with the longer you wait to submit your return.
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