Knowledge

Self-employed National Insurance explained

Posted on Jul 10th, 2018 | Tax

National Insurance is great. It builds up your state pension entitlement and helps pay for the NHS and other welfare services. Self-employed people who are sole traders pay National Insurance dependent on how much profit they make from their trade. National Insurance, unlike income tax, is only payable by people who are 16 or over, and below the state pension retirement age.

What is a National Insurance number?

Your National Insurance (NI) number is your personal identifier for the social security system. This identifier ensures that your National Insurance contributions and tax are properly recorded.

How do I register for National Insurance when I’m self-employed?

When you register as self-employed with HMRC, this covers both Income Tax and National Insurance.

What National Insurance do I pay when I’m self-employed?

As part of the Treasury’s annual budget process, all employment taxes, including the thresholds which affect National Insurance Contributions (NICs) are reviewed. This means from 6th April every year, you need to be aware of the amount of NICs due on the profits made by your sole trader business.

The first thing to understand is that sole traders have different NIC rates to those of PAYE employees (such as limited company directors – who should read our article “How much should I take as a salary“).

There are two main classes of NICs which apply to sole trader profits:

  • Class 2 NICs – payable as a weekly flat rate of £2.95
  • Class 4 NICs – payable as percentage of sole trader profits.
    Both are calculated as part of the annual Self Assessment process.

 

Class 2 NICs

For the 2018/19 tax year, you will need to pay Class 2 National Insurance if the profit made by your sole trader business is more than £6,205. The £6,205 amount is known as the ‘Small Profits Threshold’.

The Class 2 rate per week is £2.95, which you need to pay annually to HMRC through the Self Assessment process. So your Self Assessment liability to HMRC includes the Class 2 NIC of £153.40 for the tax year.

No National Insurance is payable on any profit up to the Small Profits Threshold.

Class 4 NICs

For the 2018/19 tax year, you’ll need to pay Class 4 National Insurance if the profit made by your sole trade business is more than £8,424. The £8,424 amount is known as the ‘Lower Profits Limit’.

If your profits are £8,424 or more a year, you’ll pay Class 4 NICs of:

  • 9% on profits between £8,424 and £46,350
  • 2% on profits over £46,350.

The £46,350 amount is known as the ‘Upper Profits limit’.

Class 4 NICs are calculated annually by HMRC as part of your Self Assessment. Your Self Assessment liability will include a calculation based on the amount of profit made by your sole trader business.

For Class 4 NICs, you’ll usually pay the amount due to HMRC every six months as part of your payment on account (31st July each year) and/or your final Self Assessment payment (31st January each year). The payment on account is usually an estimate.

Voluntary contributions

HMRC allows you to make voluntary National Insurance contributions. However, this is a specialist area and you’ll need to take advice based on your individual circumstances. You’ll need to liaise closely with HMRC to ensure any voluntary contribution made is calculated correctly.

Useful tools and resources

Business guides

From understanding expenses to starting a limited company, we've a range of jargon-free business guides for you to download and keep.

Invoicing software and templates

Create, send and store sole trader invoices in a snap with our free invoice software. You can also download a selection of invoice templates for all business types.

Take-home pay calculator

Use our Take-Home Pay Calculator to work out your true earnings and see if you could save money with a different company set up.