National Insurance Contributions for the Self Employed

When taking steps to becoming self employed people often take time to consider the tax bill they will have after each year of trading but can often overlook the cost of national insurance contributions. 

When registering a new business with H M Revenue and Customs information about Class 2 National is readily available, but people can be unaware that, when self employed, there is also Class 4 national insurance to pay.

This guide sets out to explain how these 2 classes of national insurance are applied to you.

Will you end up paying more in NIC than you bargained for?

Class 2 National Insurance Contributions

If you’re self-employed you normally have to pay Class 2 National Insurance contributions.  When you start a new business you have three months in which to register your new business with H M Revenue and Customs.  Once HMRC know your details you will be sent details on how much to pay and when.

You pay Class 2 National Insurance contributions at a flat rate, currently £2.50 a week.  You can choose to make your payments either monthly or 6 monthly by direct debit.  From April 2011 your Class 2 National Insurance contributions payments will become due on 31 January and 31 July, the same dates as the Self-Assessment tax bill.

Class 2 National Insurance Contributions and State Benefits

Class 2 contributions count towards certain benefits, like the basic State Pension, Maternity Allowance and Bereavement Benefit.  But any claims for benefits may be affected if your payments are late.

Class 2 contributions do not normally count towards the additional State Pension, Statutory Sick Pay or Jobseeker’s Allowance, so you might want to think about making other arrangements like a personal pension and income protection insurance.

Class 2 National Insurance credits if you could not work 

You don’t have to pay Class 2 National Insurance contributions for any complete week when you can’t work due to illness or you are caring for someone and are receiving certain benefits, but you may be able to get National Insurance credits instead.  Credits can help maintain your National Insurance record and so protect your entitlement to the basic State Pension and certain other state benefits.

Exceptions to paying Class 2 National Insurance Contributions

You don’t have to pay Class 2 National Insurance contributions if any of the following apply:

  • you are under 16
  • you have reached State Pension age
  • you’re a married woman or widow who is entitled to pay reduced contributions
  • your earnings are below a certain level – see ‘If you have low earnings’ below
  • for complete weeks when you could not work if certain conditions are met

If you have low earnings

If you anticipate that your net profit from your self-employment business is likely to be less than £5,315 per year you can apply for a Certificate of Small Earnings Exception and not pay Class 2 National Insurance contributions. Once issued this Certificate of Small Earnings Exception will cover a period of several years.  Once the period expires you will need to apply for a new Certificate.  However, if during the period covered by a certificate, your earnings rise above £5,315, HMRC must be notified and Class 2 contributions become due.

If you do have low earnings you might decide to carry on paying Class 2  voluntarily to keep your entitlement to the State Pension and other benefits.  However, if you are also in employment whilst trying to get a young business off the ground, it is likely that you will be paying national insurance on a salary, in which case, your entitlement will not be affected and so voluntary payments will not be required.

If you want to apply for a Certificate of Small Earnings Exception you will need to complete form CF10 (easily found online if you Google “HMRC CF10”.

Class 4 National Insurance Contributions

If you are self-emplyed and your annual profits are over a certain amount you normally have to pay Class 4 National Insurance contributions in addition to Class 2 contributions.  This guide explains how much you pay and the circumstances when you may be exempt from paying.

The amount of Class 4 National Insurance contributions you have to pay for any tax year is based on your profits for that year. You pay 9 per cent on annual profits between £7,225 and £42,475 (2011-12) and 2 per cent on any profit over that amount.

You work out your Class 4 National Insurance contributions on your Self Assessment tax return and pay them alongside your Income Tax.  Class 4 National Insurance contributions don’t count towards benefit entitlements.

If you have more than one business, special rules apply for calculating adjustments to profits on which you pay Class 4 National Insurance contributions.

If you file your return online, your Class 4 National Insurance contributions will be worked out for you automatically. If you send in a paper tax return by 31 October following the end of the tax year and leave the space blank, HMRC will work out your contributions. You can work out your Class 4 contributions yourself by using the Class 4 calculator in the notes that come with your tax return supplement.  Perhaps obviously, we at Balance Accountants, strongly recommend that you appoint a reputable accountant to look after this for you.

Exceptions to paying Class 4 National Insurance contributions

You don’t have to pay Class 4 National Insurance contributions if any of the following apply:

  • you are under 16
  • you are still working in the tax year after you reached State Pension age
  • you are not resident in the UK for tax purposes

If you are under 16 you’ll have to apply for an exemption by filling in form CA2835U. You can get the form by writing to:

HM Revenue & Customs
Deferment Services
National Insurance Contributions Office
Benton Park View
Newcastle upon Tyne
NE98 1ZZ

This article was prepared by Deborah Bradley on behalf of the Balance Team.  If you have any comments please leave them below.

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