Understanding National Insurance if you're self-employed
There are two main taxes we all pay on our income - income tax and national insurance (see the related article for an overview).
Both are taken into account automatically if you are on a salary, and your employer will pay your taxes to HMRC out of what you earn.
If you're self-employed, more responsibility falls on you. You're responsible for both your income tax (calculated as a percentage of what you earn above a personal allowance) and national insurance. The good news is that untied makes it easy, but sometimes there are questions for you to answer, especially around national insurance.
National insurance can also affect what you get in your pension (see the linked article).
This article sets out what you need to know.
Most self-employed people pay two types of National Insurance Contributions (NICs):
- A fixed amount per week (once your profits are over a threshold of around £6,500 a year, you'll pay £3.05 a week - the exact numbers depend on the tax year) - known as Class 2 contributions
- A percentage of your profits (this applies once your profits exceed a higher threshold of about £9,500 - and works out at 9% for profits up to £50,000 and 2% on higher profits) - known as Class 4 contributions
untied shows any national insurance you need to pay in your final tax calculation within our app
Fixed weekly contributions - Class 2
While we refer to weekly contributions, they can also be calculated yearly (we did say it's harder to get your head around!).
You may be exempt from paying this weekly contribution (Class 2). The main exemption is that you won't need to pay the weekly contribution if you are under 16 years or already over state pension age.
You also don't need to pay the weekly contribution if you earn less than the threshold. But you still have a choice to do so voluntarily. It sounds strange but the reason is that the contributions you make over your life give you entitlement to state benefits such as:
- Your basic state pension
- Maternity allowance
- Bereavement benefit
- Contribution-based Employment & Support Allowance (ESA)
Missing a year or two during your career won't make a difference, but if you are regularly earning less than the threshold you may find it is in your interest to make this voluntary contribution. To do this, just tick the following box when you do a tax return:
Percent-based annual contributions - Class 4
These are much more straightforward and are effectively another tax on earnings (there is an equivalent for those who are employed). You stop paying the annual contribution (Class 4) at the end of the tax year in which you reach state pension age.
If you want more information about National Insurance you can contact HMRC via the inquiries page: National Insurance enquiries