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 paid at the current weekly rate set by HMRC.

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 you should check the current threshold on the HMRC website. 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, Class 4 NICs are calculated on profits above the lower threshold at rates set by HMRC - check the current rates and thresholds. 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. Employee National Insurance rates vary 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. Both employees and self-employed people can build entitlement to the State Pension through their National Insurance contributions. 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.

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