Self-Employed National Insurance Explained - More Than Accountants

Self-Employed National Insurance Explained

National Insurance is excellent. It can help you in paying for your NHS and other welfare services. At the same time, you will be able to grow your state pension entitlement. Self-employed individuals are also known as sole traders and they are required to pay their National Insurance depending on the profit that they earned from their business. Contrary to income tax, National Insurance will only be paid by individuals who are 16 years old and above and are less than the state pension retirement age.

What Is A National Insurance Number?

A person’s National Insurance (NI) number will be his personal identifier which will be used in accessing the social security system. With this identifier, you can guarantee that your tax and National Insurance contributions are accurately recorded.

How Can I Register for National Insurance If I’m Self-Employed?

Upon registering yourself as self-employed with HMRC, it already includes National Insurance and Income Tax.

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What Type of National Insurance Should Self-Employed Individuals Pay?

The Treasury will be reviewing all employment taxes as part of their annual budget process. It also includes the thresholds which can influence the National Insurance Contributions (NICs). In other words, starting on April 6th each year, you should have some knowledge on the amount of NICs which you need to pay as a sole trader based on the profit that you’ve made.

First and foremost, you need to understand that the NIC rates of sole traders are different from PAYE employees including limited company directors.

There are two major categories of NICs which can be applicable to the profits of the sole trader:

Class 2 NICs – This can be paid on a weekly flat rate of £3.05, in the year 2019-2020 it was only £3.00.

Class 4 NICs – The payment of this will be based on the percentage of the sole trader profits.

Both of these are computed as part of the annual Self Assessment process.

Class 2 NICs

For the tax year 2020-2021, if the profit that you’ve made as a sole trader is over £6,475 (in the tax year 2019-2020, it was £6,365) then you will be required to pay Class 2 National Insurance.  This amount is also referred to as the “Small Profits Threshold.”

The rate per week for Class 2 NIC is £3.05, which you are required to pay yearly to HMRC via the Self Assessment process. As a result, your Self Assessment liability to HMRC will now include £158.60 as payment for Class 2 NIC for the tax year, in the year 2019-2020, the rate was £156.00.

You will not be required to pay any National Insurance in case your profit exceeds the Small Profits Threshold. However, you may want to make a voluntary contribution for Class 2 NI.

Class 4 NICs

If you’ve made a profit of over £9,500 on your sole trade business for the year 2020-2021, then you will be required to pay Class 4 National Insurance. In the tax year 2019-2020, the amount was £8,632. This amount is also referred to as the “Lower Profits Limit.”

If the profits that you’ve made in one year is £9,500 or more, then you will be required to pay the following for your Class 4 NICs:

If your profit is between £9,500 and £50,000, then you will pay 9% on your profit.

If your profit is more than £50,000, then you will need to pay 2% on your profit.

The amount of £50,000 is also referred to as the “Upper Profits limit”.

Keep in mind that Class 4 NICs are computed by HMRC yearly as part of your Self Assessment. Also, your Self Assessment liability will incorporate a computation based on the profit that you’ve made from your sole trader business.

When it comes to Class 4 NICs, you will normally have to pay the required amount every six months to HMRC. This is considered as part of your payment on account, which usually occurs on July 31st every year. It is also part of your final Self Assessment payment, which is paid on January 31st each year. Most often, the payment on account is just an estimate.

Class 1 (Employer’s) National Insurance Contributions

If you are a sole trader, then there is no need to worry about any of these. On the other hand, if you have employees working on your sole trade business, other than freelancers, subcontractors or yourself, then you will be required to compute a payroll for them. In case the earnings of your employees are more than the National Insurance earnings threshold, then you have to make an employer’s NICs for them. At the same time, you have to make sure that you are making the right deductions for their employee’s NICs.

For employer NICs, its threshold is just similar to the employees. If ever you have an employee whose salary is more than the weekly National Insurance earnings threshold, then as an employer you have to pay NICs at 13.8%. This means that this is another PAYE tax that the company needs to pay.


Voluntary Contributions

Voluntary contributions for National Insurance is allowed by HMRC. However, this is considered as a specialist area and you will be required to take advice based on your personal circumstances. You need to communicate with HMRC to guarantee that your voluntary contribution is computed accurately.

Making voluntary contributions has a lot of benefits. You can gain Maternity Allowance, Employment and Support Allowance based on your contribution, some years towards your state pension entitlement, as well as Bereavement Support Payment. You will be able to gain these benefits even if your profit falls below the threshold. You need to get some advice from an accountant to check if this would be beneficial for you.

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