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Do Self-Employed People Have to Pay National Insurance?

In short: yes!

National Insurance is a brilliant scheme that helps pay for our NHS, welfare services and even contributes to your state pension entitlement! How much money you’d pay as a self-employed person is dependent on how much profit your business makes – so there are few steps involved in letting HMRC know how much you need to pay! Fortunately, we’ve written this little guide to help you along the way.

But, let’s start with the basics!

What is National Insurance and how do I pay it?

National Insurance is a form of tax contribution you pay to HMRC based on your earnings. Before you receive your pay slip, employment taxes (like National Insurance) are deducted using the PAYE (Pay As You Earn) system. This will happened whether you’re employed or if you’re a director of your own limited company.

In order to pay National Insurance as a sole trader, you must complete a Self Assessment Tax Return and submit this document to HMRC. This is done so HMRC can calculate your taxable income and work out how much Income Tax and National Insurance you have to pay. To do so, you’ll need a National Insurance number.

Your National Insurance number is a unique code that identifies you – it’s essentially a social security system. Without it, HMRC wouldn’t be able to identify how much tax you need to pay. If you’ve forgotten yours, or if you need to apply for one, visit the government website. Remember, you only have to pay National Insurance if you’re aged over 16!

What type of National Insurance will I pay?

When you first register as self-employed, you’re required to complete a Self Assessment form. This will cover both your National Insurance contributions and your Income Tax contributions.

On the 6th April of each year, the Treasury completes an annual budget review and reviews the all employment taxes. By doing so, they assess whether the thresholds for National Insurance Contributions (NICs) will change. They make this assessment by reviewing the total National Insurance Contributions over the fiscal year, so it’s really important you pay the contributions due on your income!

If you’re a sole trader, you’ll have a different National Insurance Contribution rate to pay than PAYE employees. What you pay can be determined by one of two main classes dependent on your profits. These are:

  • Class 2 NICs – these are payable as a flat rate of £3.05 per week (for 2021/2022 fiscal period).
  • Class 4 NICs – this is payable as a percentage of your profits, calculated by completing a self-assessment form.

Class 2 NICs

Class 2 National Insurance Contributions must be paid if the profit of your business is greater than the ‘Small Profits Threshold’. For this fiscal year (2021/22), this amount is £6,515. So, if your business profits more than this amount within this year, you’ll have to make Class 2 NICs.

As mentioned above, you’ll pay a flat rate of £3.05 per week, meaning your National Insurance Contribution for the year would be £158.60. This is your Self Assessment liability.

If you earn below this amount in profit, you don’t have to make NIC.

Class 4 NICs

Class 4 NICs are a little more complicated as these contributions are payable based on a percentage of your profits. For the 2021/22 fiscal period, you’ll pay Class 4 NICs if your profits are greater than £9,568.

For Sole Traders with profits greater than £9,568 and fewer than £50,270, you’ll pay a 9% tax on your profits. For the ‘Upper Profits limit’, those earning profits over £50,270 will contribute a 2% rate on these profits.

Do you need help with your accounting?

You probably didn’t start your business to give yourself headaches over financial accounting! But we did! Our experienced team are there to take the weight off your shoulders. If you’re looking for more information, take a look at our other educational guides.

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