Cloud accounting
Accountant and bookkeeper product update - Your Books is now "Advanced"
TAX AND PENSIONS
National Insurance for sole traders: the complete guide
Whatever industry you’re in, keeping on top of personal finances is vital for any sole trader. A vital element to this is monitoring what national insurance contributions you have to make.
National Insurance is a vital framework that underpins your contributions towards social security, healthcare, and state benefits. As a sole trader, you’ll normally need to pay Class 2 and Class 4 contributions, although there are some instances where you may be exempt.
Whether you're just starting your solo venture or seeking clarity on your obligations, Quickbooks UK’s comprehensive guide will illuminate the importance of National Insurance and how it safeguards your business. Let's dive in.
What are the National Insurance Contributions (NICs) for self-employed people?
As a self-employed individual, you will be liable to pay National Insurance Contributions (NICs) between the ages of 16 and state retirement age. Your state pension age can be determined using the calculator on GOV.UK.
Currently, self-employed individuals earning sufficient profits are required to pay two different classes of NICs: Class 2 and Class 4. The table below provides a summary of these classes. However, if you are a married woman or widow eligible for reduced rate contributions, Class 2 NIC is not mandatory for you. Additional special rules apply to share fishermen, volunteer development workers, examiners, and exam markers, which can be found on GOV.UK. Stay informed and fulfil your NIC obligations for a secure financial future.
What are Class 2 National Insurance Contributions?
Class 2 National Insurance Contributions play a significant role in the financial obligations of self-employed individuals. Once you embark on your self-employment journey, you become liable to pay Class 2 NICs. In most cases, individuals pay both Class 2 and Class 4 NICs, along with income tax through self-assessment payments in January.
However, there is a provision for those whose profits do not reach a particular level. This is known as the Lower Profit Threshold, and aligns with the tax-free personal allowance of £12,570 as of July 6, 2023. If your profits are below this threshold, you are exempt from paying Class 2 NICs, and there is no need to claim the exemption in advance.
Meanwhile, there is also the Small Profit Threshold, which is set at £6,725 for the 2023/24 tax year (unchanged from the previous year). This pertains to Class 2 National Insurance Contributions (NICs) for self-employed individuals. If your self-employed profits are below this threshold, you are exempt from mandatory Class 2 NIC payments. However, you retain the choice to make voluntary Class 2 NIC contributions at the tax year's end.
This is in contrast to the Lower Profit Threshold, which is more aligned with the tax-free personal allowance and grants automatic exemption from Class 2 NICs for those whose profits fall below it.
It's worth noting that some self-employed individuals may choose to voluntarily pay Class 2 NICs. This option is available through the self-assessment tax return. Making voluntary payments can have its benefits, especially if you intend to claim Maternity Allowance before the usual self-assessment payment date for the tax year.
For the tax year 2023-24, the rate for Class 2 National Insurance stands at £3.15 per week. However, it's important to remember that the amount payable is based on the level of your business profits. To ensure compliance and access detailed information, visit the Gov.uk website to register online or reach out to the Newly Self-Employed Helpline at 0300 200 3504.
It's worth mentioning that specific rates of Class 2 National Insurance apply to share fishermen and volunteer development workers. For a comprehensive understanding of these rates, refer to the Share Fishermen and Volunteer Development Workers pages on the HMRC website.
Stay informed and up-to-date with your National Insurance obligations as a self-employed individual. By understanding the intricacies of Class 2 NICs and how they relate to your business profits, you can manage your finances effectively and ensure compliance with HMRC regulations.
What are Class 4 National Insurance Contributions?
Class 4 National Insurance Contributions are a crucial aspect of the self-employed tax responsibilities, and are directly linked to taxable profits.
If your taxable profits exceed the lower Class 4 profit limit, you'll be subject to a rate of 9% on profits above this threshold before the 6th April 2024, and a rate of 8% afterwards. For the tax year 2023/24, the lower limit is £12,570 from 6th July 2023.
Additionally, from the 6th of April 2024, paying Class 4 NICs will negate the liability to also pay Class 2 NICs. Please see the Government's November 2023 statement for more information.
Class 4 NICs are typically paid alongside income tax, with two payment deadlines falling on 31st January and 31st July each tax year. This synchronised payment approach streamlines the contribution process, making it more manageable for self-employed individuals.
However, if your profits soar to a higher bracket, surpassing £50,270 in 2023-24, the rate of Class 4 National Insurance decreases to 2%. This reduction applies to profits above this higher limit, providing some relief for entrepreneurs experiencing substantial success.
Staying informed about Class 4 NICs is paramount, as it ensures accurate and timely contributions to HMRC. Properly managing your tax obligations guarantees a smoother financial journey and compliance with tax regulations.
Do I have to pay National Insurance Contributions?
National Insurance Contributions are mandatory for self-employed individuals, except if their profits fall below the threshold, exempting them from Class 2 NICs. However, some individuals may choose to pay Class 2 NICs voluntarily to secure their pension entitlement and certain State Benefits.
If profits exceed the small earnings exception level or the Small Profit Threshold, payment of Class 2 NICs becomes compulsory. Keep aware of your eligibility and obligations to ensure you protect your future financial security and access the benefits you are entitled to.
How do you register for Class 2 and Class 4 NICs?
When becoming self-employed, registering with HMRC covers both income tax and National Insurance contributions (NICs). To initiate the registration process, visit our guide on registering as a sole trader with HMRC.
Remember, failure to register your self-employment with HMRC may lead to rejected Class 2 NIC payments or inaccurately recorded contributions. It's crucial to follow HMRC's specific registration process for the self-employed, even if you already submit Self Assessment tax returns for other purposes.
Ensure you adhere to the proper procedures to avoid any discrepancies and ensure your contributions are appropriately accounted for.
How do you know what NICs you owe?
Class 2 NICs
Calculating your National Insurance Contributions (NICs) depends on various factors. For Class 2 NICs, the amount is a fixed weekly sum, set at £3.15 for the 2022/23 tax year and £3.45 for 2023/24, applicable to those with sufficient profits. However, the rules for Class 2 NICs have changed starting from the 2022/23 tax year.
Previously, you paid Class 2 NICs if your profits exceeded the Small Profits Threshold. From 2022/23 onwards, you pay Class 2 NICs if your profits are above the Lower Profits Limit, which amounts to £12,570 for the tax year 2023/24 (it was £11,908 for 2022/23).
If your profits fall below the Small Profits Threshold (£6,725 for 2022/23 and 2023/24), you have the option to voluntarily pay Class 2 NICs. If your profits are between the Small Profits Threshold and the Lower Profits Limit, you will be treated as making Class 2 NICs, granting you access to contributory benefits as if you had paid them.
To calculate your Class 2 NICs, consider the number of weeks you are self-employed during the tax year, with each week running from Sunday to Saturday. If a contribution week spans two tax years, it is attributed to the earlier year. For instance, if you began self-employment on 5th February 2023, you should pay 9 weeks' Class 2 NICs for 2022/23, totalling £28.35 (9 weeks x £3.15), as there are 9 weeks between 5th February 2023 and 5th April 2023.
Class 4 NICs
For Class 4 NICs, the amount is based on your self-employed profits, and you are only liable to pay if your profits surpass the Lower Profits Limit, set at £12,570 for 2023/24 (and £11,908 for 2022/23 tax year). Understanding the calculations helps you accurately assess your NIC obligations and ensures compliance with HMRC regulations.
The profit bands for the 2023/24 tax year are as follows:
Up to £12,570: No Class 4 NICs payable.
£12,570 up to £50,270: A 9% Class 4 NIC rate is applied to profits falling within this range.
Over £50,270: For profits exceeding this threshold, a 2% Class 4 NIC rate is applicable.
Make sure to assess your taxable profits and determine the appropriate profit band to ascertain your Class 4 NIC liability accurately. Complying with the correct NIC rates ensures proper fulfilment of your financial responsibilities as a self-employed individual. For previous tax years, refer to the relevant tax and NIC rates page for the applicable information.
Be mindful of these thresholds and make informed financial decisions to secure your entitlements and benefits effectively.
How do you pay National Insurance Contributions?
Class 2 and Class 4 National Insurance Contributions (NICs) are conveniently calculated and paid alongside income tax liabilities, utilising the Self Assessment system. For those who make payments on account, Class 4 NICs are included in the instalment calculations. Otherwise, Class 4 NICs are due on 31 January after the tax year concludes. Class 2 NICs, regardless of payment on account, are due on the same date.
When Class 2 NICs are essential for certain benefits, like Maternity Allowance, it's advisable to pay them before the Self Assessment deadline. This ensures timely entitlement to those benefits.
Alternatively, you have the option to make regular NIC payments throughout the tax year instead of a lump sum. By understanding the payment process and your entitlements, you can effectively manage your NIC obligations and secure any necessary benefits. Stay informed and plan accordingly to meet your financial responsibilities.
What is the difference between Class 2 and Class 4 NICs?
As a self-employed individual, understanding the distinctions between the two types of NICs is essential for managing your financial obligations.
This table outlines the payment amounts, minimum and maximum profit thresholds, liability, due dates, and payment methods for both Class 2 and Class 4 NICs.
| Class 2 | Class 4 |
How much do you pay? | £3.45 per week for each week you are self-employed, if your profits exceed the Lower Profits Limit in that tax year. | Calculated as 9% on self-employment profits above the Lower Profits Limit (before 6 April 2024, and 8% afterward) and at 2% above an upper limit (see below for an exception). |
Liability | Mandatory unless below the Small Profits Threshold; Voluntary option available. | Payable on profits above £12,570. |
Minimum profits to pay NIC | Below the Small Profits Threshold of £6,725. | Profits above £12,570. |
Maximum profits to pay NIC | N/A (Exemption for some cases). | Profits above £50,270 at 2%. |
When is it paid? | Due by the 31 January following the end of the tax year as part of the Self Assessment process. Not included in payments on account. | Part of the Self Assessment process, paid as part of any payments on account or by 31 January following the tax year. |
How is it paid? | Usually paid as part of your Self Assessment tax. | Paid as part of your Self Assessment tax. |
What are the exemptions to paying National Insurance Contributions?
Exemptions to paying National Insurance Contributions (NICs) apply from the 2022/23 tax year onwards for both Class 2 and Class 4 NICs. If your self-employed profits for the 2023/24 tax year fall below £6,725 (Small Profits Threshold), you are exempt from paying Class 2 NICs. Additionally, if your profits are less than £12,570 (Lower Profits Limit), you are exempt from both Class 2 and Class 4 NICs.
These exemptions ensure that individuals with lower profits or earnings below the specified thresholds are not obligated to make National Insurance Contributions, providing financial relief in certain circumstances.
Let’s explore the Small Profits Threshold and Lower Profit Limit in more detail:
What is the Small Profits Threshold?
The Small Profits Threshold pertains specifically to Class 2 National Insurance Contributions (NICs). For the 2023/24 tax year, the Small Profits Threshold is set at £6,725 (the same as the 2022/23 tax year).
If your self-employed profits fall below £6,725 for the 2023/24 tax year, you are exempt from paying Class 2 NIC. However, you will have the option to make voluntary payments of Class 2 NIC at the end of the tax year if you wish to do so.
Starting from the 2022/23 tax year, if your profits exceed the Small Profits Threshold but remain below the Lower Profits Limit, you will be treated as having made Class 2 NIC without the requirement to make any actual payments.
What is the Lower Profits Limit?
The Lower Profits Limit is the threshold at which both Class 2 and Class 4 National Insurance Contributions (NICs) come into effect. For the 2023/24 tax year, this limit stands at £12,570 (£11,908 for 2022/23).
If your self-employed profits fall below £12,570 for the 2023/24 tax year, you are exempt from paying both Class 2 NIC and Class 4 NIC.
Starting from the 2022/23 tax year, if your profits from self-employment are within the range between the Small Profits Threshold and the Lower Profits Limit, you are not required to pay Class 2 NIC, but you will be considered as having made Class 2 contributions.
Do you need to pay NICs if you are employed as well as self-employed?
In most cases, individuals who are both employed and self-employed are required to pay National Insurance Contributions (NICs). However, there is an exception: if you already pay the maximum amount of annual NICs through Class 1 and Class 2 contributions, you might not be obligated to pay the full amount of Class 4 NICs. In such situations, a 2% Class 4 NIC rate will apply only to profits exceeding £12,570 (for 2023/24).
Your Class 4 NIC liability will be automatically calculated if you file your tax return online or submit your paper tax return by the due date (usually 31st October following the tax year end) as part of the Self Assessment process. Ensuring compliance with the Self Assessment process helps you accurately determine your NIC obligations and fulfill your financial responsibilities.
Who is eligible for Reduced Rate Contributions?
Prior to 1977, married women were eligible to apply for a reduced rate of National Insurance Contributions (NICs). However, entitlement to reduced contributions ceases immediately in the event of marriage annulment or divorce.
To determine if you qualify for the reduced rate, you can inquire using form CF9 (for married women) or form CF9A (for widows). These forms also allow individuals to renounce their right to pay reduced rate contributions if applicable.
No matter your situation as a sole trader, ensure efficient NIC management by using the right software. With QuickBooks, you can focus on your business while it takes care of your financial needs. Whether you're a sole trader or have multiple employees, QuickBooks offers features to streamline financial tasks.
Explore the benefits of QuickBooks and find out more at our dedicated page for sole traders. Simplify your financial tasks and free up time to grow your business with QuickBooks.
The information on this website is provided free of charge and is intended to be helpful to a wide range of businesses. Because of its general nature the information cannot be taken as comprehensive and they do not constitute and should never be used as a substitute for legal, accounting, tax or professional advice. We cannot guarantee that the information applies to the individual circumstances of your business. Despite our best efforts it is possible that some information may be out of date. Any reliance you place on information found on this site or linked to on other websites will be at your own risk.
Share:
