Self Employed National Insurance
National Insurance contributions are one of these things that few of us have to worry about most of the time. For most people they are deducted automatically from our monthly salaries by an employer and that’s usually as much as any of us want to know about it. When you become self-employed, however, things change. You now become responsible for making national insurance contributions of your own.
There are several types of National Insurance contributions (NICs), known as Classes. As a self-employed person, you will have to pay Class 2 National Insurance contributions and possibly also Class 4 NICs depending on your income. To arrange for this, you must contact the government within 3 months of starting self-employment. If you wait longer, you will face an automatic fine. You can fill out a form to make NIC payments periodically, on either a monthly or quarterly basis. You have the option of being sent a bill or having the payments deducted automatically from your bank account via direct debit. Class 2 contributions are fairly low at just over £2 per week.
In some circumstances, you will be exempt from paying them entirely. For example, if you are over the state pension age, you don’t need to pay. If you anticipate earning a low income for that year, you can apply for a low earner’s exemption. The exact figure will change from year to year so you will need to check the Revenue site to be sure but in 2007 it stood at £4,635. It’s best to apply for the low pay exemption in advance but, if needed, you can apply for a refund of your Class 2 NICs retrospectively.
Whether or not you need to pay Class 4 NICs too depends on your profits from the business. Again, the exact figures will vary from year to year so you must check the Revenue site for precise details but, roughly speaking, if you earn between £5,000 and £34,000, you must pay 8% of your income between these two figures as NICS and, if you earn above £34,000, you must pay a further 1% of that amount as NICs. The amount you owe in Class 4 NICs is worked out when you do your self-assessment tax return, and paid along with your income tax.The standard rate of National Insurance Contributions for ordinary tax payers is 11% so, paying 8% only, the self-employed actually get to keep more of their own money. Their entitlement to benefits from the state system is also lower, though, so there is a price to be paid for this extra freedom.
Don’t forget that, in a standard employment relationship, the employer also makes national insurance contributions on behalf of the employee. This clearly won’t happen if you’re self-employed so you will get less from those aspects of the benefit system which depend on the level of your own contributions. Pensions are the prime example of this. While employees are entitled to both the basic state pension and an additional state pension, the self-employed get only the former. For this reason, if you’re self-employed, you might want to think about taking out a private pension to help maintain your standard of living in retirement.
The business of handling your own National Insurance Contributions is just part of the extra complexity you’ll need to deal with once you start out on business for your own. As you can see, though, it’s not too intimidating and shouldn’t prove unduly burdensome.