National Insurance Contributions for the Self-Employed: All You Need to Know

National Insurance Contributions for the Self-Employed: All You Need to Know

Whether you’re self-employed or work for someone else, you have to pay National Insurance contributions (NICs). Your contributions go towards certain state benefits, including your state pension.

Here’s a look at National Insurance basics and a rundown of what you need to know if you’re self-employed.

Who pays National Insurance contributions?

You have to pay National Insurance contributions if you’re:

  • Age 16 or over
  • Employed and earn £162 or more a week
  • Self-employed and make a profit of £6,365 a year or more (effective from 6 April 2019)

How much you pay depends on your earnings. We’ll come to that later.

There are a number of classes of NIC. Employees and agency workers pay National Insurance at a different rate from people who work for themselves.

When you reach state pension age, you can stop paying National Insurance, even if you carry on working. That’s unless you’re paying Class 4 National Insurance — which is what self-employed people pay. You’ll have to keep paying this until the start of the next tax year after you reach state pension age.

What benefits do my NICs pay for?

Your National Insurance contributions count towards the following benefits:

  • State pension
  • Maternity Allowance
  • Contribution-based Jobseeker’s Allowance
  • Contribution-based Employment and Support Allowance
  • Bereavement benefits

You can get these benefits only by making National Insurance contributions.

Benefits that DON’T depend on NICs include:

  • Attendance Allowance and Disability Living Allowance
  • Child benefit
  • Guardian’s Allowance
  • Income-based Jobseeker’s Allowance
  • Industrial injuries
  • Carer’s Allowance
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What are the different classes of National Insurance contributions?

Which class of National Insurance you pay depends on your employment status, what you earn, and whether your National Insurance record has any gaps.

Here’s a look at the different classes and who they apply to:

National Insurance Class Applies to
Class 1 Employees under state pension age earning more than £162/week. Deducted at source
Class 1A or 1B Paid directly by employer on expenses or benefits
Class 2 Self-employed – to qualify for benefits such as the state pension
Class 3 Voluntary contributions, to fill gaps in your record
Class 4 Self-employed with profits over £8,424 a year

What if I earn less?

If you’re self-employed and your profits fall below a certain limit, called the small profits threshold, you won’t have to pay Class 2 or Class 4 NICs. For 2018/19, that limit is £6,205. However, you can pay Class 2 NICs voluntarily.

In some circumstances, Class 2 NICs can also be paid by employed or self-employed people working overseas.

What are Class 4 NICs?

You pay Class 4 NICs on top of Class 2 NICs if you’re self-employed and earn more than £8,424 a year (this will go up to £8,632 from 6 April 2019). This is called the Lower Profits Limit.

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

When you’re self-employed, your Class 2 and Class 4 National Insurance Contributions get calculated and paid with your income tax, through the self-assessment system. If you make payments on account, your Class 4 NICs will automatically be paid with these instalments.

If you don’t make payments on account, your Class 4 NICs will be due on 31 January after the relevant tax year (or three months earlier, on 31 October, if you file a paper return). Your Class 2 NICs are also due on 31 January (or 31 October, if you file a paper return).

If you want to claim particular benefits, such as Maternity Allowance, you might need to pay your Class 2s before the self-assessment deadline. Alternatively, you can pay your Class 2 NICs regularly throughout the tax year, instead of a lump sum payment. Get in touch with HMRC to set this up.

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How much self-employed National Insurance do I pay?

Class 2 NI is a fixed weekly amount. For 2018/19, that’s £2.95 per week provided your profits are above the small profits threshold. How much is due depends on the number of weeks of self-employment in the tax year.

Let’s say your self-employment began on 1 March 2019. You’ll pay five weeks’ Class 2 NICs, i.e. 5 x £2.95 = £14.75.

Class 4 NICs are different. They depend on your self-employed profits. You’ll pay only if they’re above a certain level (the lower-profits limit). For 2018/19, that’s £8,424.

You pay Class 4 NICs on your taxable self-employed profits. Here are the 2018/19 profit bands that apply:

Profit Band Class 4 NIC
Up to £8,424 nil
£8,424 up to £46,350 9%
Over £46,350 2%

Examples

Here are two examples: one for someone with lower profits and one for someone with higher profits.

Joe’s profits for the tax year 2018/19 are £12,000. HMRC would calculate his Class 4 NIC liability as follows:

First £8,424 @ 0% nil
On next £3,576 @ 9% £321.84
Total due £321.84

For the tax year 2018/19, Colette’s profits are £50,000. This is her Class 4 NIC liability:

First £8,424 @ 0% nil
Next £37,926 @ 9% £3,413.34
£3,650 @ 2% £73.00
Total due £3,486.34

Can I check my National Insurance contributions record?

From time to time, you might want to check your National Insurance contributions record. Not least because you’ll need 35 qualifying years to receive your full new state pension.

HMRC keeps a record of all the NICs you’ve paid. Here’s how you can check your NIC record:

What are the New NIC Rates?

In 2015, the government stated its intention to merge Class 2 and Class 4 NICs. However, it recently had a change of mind. Instead, 2019/20 will see a rise in Class 2 NICs of 5p a week:

Type 2019-20 2018-19
Class 2 £3 per week £2.95 per week
Class 4 9% on profits between £8,632 to £50,000 9% on profits between £8,424 to £46,350
Class 4 2% on profits over £50,000 2% on profits over £46,350

The government has also adjusted the Class 4 National Insurance thresholds to bring them in line with the new income tax bands.

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How do Class 2 and Class 4 NICs compare?

Here are the main differences between Class 2 and Class 4 NICs. The rates are for the 2018/19 tax year.

  Class 2 Class 4
How much? £2.95 per week from becoming self-employed Usually, this is 9% on profits but a minimum threshold and upper limit apply
Minimum level of profits before paying NIC? You pay no Class 2 NI if your profits come below the Small Profit Threshold of £6,205 Class 4 NICs begin on profits above £8,424
Maximum level of profits when you stop paying NIC? If you are both employed and self-employed and paying the maximum amount of employees’ NIC (Class 1), you might not have to pay Class 2 On profits above £46,350, you pay Class 4 NICs at 2%. If you are both employed and self-employed and paying the maximum amount of employees’ NIC (Class 1), you might have to pay Class 4 on profits above £8,424 at 2%
When do I pay? On the 31 January after the end of the relevant tax year as part of self-assessment. It is not included in any payments on account It is part of self-assessment so payment can be due as payments on account by the 31 January after the end of the relevant tax year
How do I pay it? As part of your self-assessment As part of your self-assessment

What about Class 2 if I’m both employed and self-employed?

We’ve mentioned that, in general, you’ll still need to pay NICs if you’re both employed and self-employed. Here’s how it works.

If you pay the maximum amount of Class 1 NICs, you might not have to pay any more. HMRC automatically calculates your liability for Class 2 NICs as part of self-assessment. If you’re due to pay any Class 2 NICs, they get lumped in with the tax you pay on 31 January after the end of the relevant tax year.

What about Class 4 if I’m both employed and self-employed?

In general, you’ll need to pay. But if your Class 1 and Class 2 NICs make up the maximum amount of annual NICs, you might not have to pay the full amount of Class 4 NICs.

Instead, you’ll pay 2% Class 4 NICs on your profits above £8,424 (2018/19 rate). HMRC will automatically calculate your Class 4 NIC liability as part of self-assessment.

Might I want to pay class 2 NICs even if I earn below the small profits threshold?

Yes. Doing this can protect your eligibility to particular state benefits. This eligibility depends on you having paid a certain amount of Class 2 NICs in a defined period. The benefits most likely to come into this equation are Maternity Allowance and occasionally the Contributions-based Employment and Support Allowance.

If you think this applies to you, get in touch with HMRC to arrange to pay the Class 2 NICs ahead of the self-assessment deadline. 

NICs: General Enquiries

We hope this helps you get your head around National Insurance contributions for the self-employed. If you still have questions, however, you can check out the government’s advice page.

Nigel Graber

Nigel Graber has been a freelance copywriter and small-business owner in the UK since 2003. He works with sole traders and start-ups right through to blue-chips and multinationals.

MileIQ’s blog does not constitute professional tax advice. You should contact your own tax professional to discuss your situation.

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