There are no benefits associated to Class 4 contributions; they are simply a profit-based tax. Contributions are calculated based on the amount of profit earned in a given tax year… Profits for Class 4 purposes are calculated in the same way as profits for income tax purposes.
What National Insurance do I pay on self-employed income?
Between the ages of 16 and state retirement age, you only pay National Insurance contributions (NIC). Using the GOV.UK calculator, you may determine your state pension age.
If you are self-employed, you currently pay two different classes of National Insurance Contributions (NICs): Class 2 and Class 4, which are summarized here. You do not have to pay Class 2 NIC if you are a married woman or widow who is eligible for lower rate contributions. You may learn more about the unique rules that apply to share fishermen, volunteer development workers, and examiners and exam markers on GOV.UK.
What is self-employed income for Class 2 NIC purposes?
This includes not only income from self-employment, but also revenue from anyone who engages in a commercial activity even if it is an investment activity like property rental. However, keep in mind that we’re discussing a commercial activity. The letting of a single property is unlikely to be considered a business activity.
How do I register for Class 2 and 4 NIC?
When you register as a self-employed person with HMRC, you are covered for both income tax and National Insurance. Registration information is available at How do I register for tax and national insurance?
How do I know how much to pay?
The distinctions between Class 2 and Class 4 NIC, including how much and when you pay, are summarized in the chart below. Class 2 NIC is a fixed weekly amount – £3.05 for 2021/22 if profits are above the small profits threshold. The amount of Class 2 NIC due is calculated based on the number of weeks you worked as a self-employed person during the tax year. A week is defined as the period from Sunday dawn to Saturday midnight. So, if you started self-employment on February 7, 2022, you should pay 9 weeks’ Class 2 NIC for 2021/22, or 9 x £3.05 = £27.45, because there are 9 weeks between February 7 and April 5, 2022. (that contribution week actually ends on 9 April).
The level of your self-employed profits determines your Class 4 NIC. Class 4 NIC is only payable if your profits above a specified threshold, known as the lower profits limit. For 2021/22, this is £9,568.
So how much Class 4 NIC do I pay?
Your taxable self-employed profits, as well as any profits from a commercial activity, are subject to Class 4 NIC (on the same basis as for Class 2 NIC above). The National Insurance Contribution (NIC) is paid in profit bands as follows (numbers for 2021/22):
Do you have to pay Class 2 and Class 4 National Insurance?
The government has announced that it intends to eliminate Class 2 national insurance, although no date has been specified.
When you start working for yourself, you must pay Class 2 National Insurance.
The majority of people will pay both class 2 and class 4 national insurance, as well as income tax (in January self-assessment payments). People who earn less than the Small Profit Threshold (£6,515 in 2021/22) will not be required to pay any class 2 National Insurance. They won’t have to apply for an exemption ahead of time.
You may choose to pay class 2 National Insurance on a voluntary basis in particular circumstances. On the self-assessment tax return, you can do this.
Even if your revenues exceed the Small Profit Threshold, you may need to consider making a voluntary class 2 National Insurance contribution in advance. This is likely to be the case if you intend to claim Maternity Allowance before the end of the tax year’s self-assessment payment period.
What are Class 4 National Insurance contributions used for?
Nl. Sole Trader When you first start working, you must pay national insurance (NI), which is a tax on all earnings and income. State benefits, compulsory sick pay, maternity leave, and other work benefits are funded in part by your national insurance contributions.
Schedule 2, para 5, Social Security Contributions and Benefits Act 1992
Several groups of people are exempt from paying Class 4 NICs, including:
- Class 4 NICs are not applicable to anyone under the age of 16 at the start of the assessment year (Regulation 93 SS(C)R 2001).
- People who were over the State pension age at the start of the assessment year (Regulation 91(a) SS(C)R 2001). A person who reaches State pension age during the assessment year is nevertheless liable for Class 4 NICs for the remainder of the year.
- Under SSCBA92/SCH2/PARA5, trustees, guardians, and other relatives of an incompetent person who are subject to tax under ITTOIA2005/S8 are excluded from paying Class 4 NICs on such income.
Do sole traders pay Class 4 National Insurance?
If you have gaps in your National Insurance record, for example, you may choose to pay voluntary Class 3 National Insurance contributions. Voluntary contributions will be applied to some state entitlements throughout that payment period, such as a credit toward the new flat-rate state pension.
You can contact HM Revenue and Customs to review your current national insurance credits (HMRC). It’s worth noting that the new flat-rate pension goes into effect in April 2016.
It’s critical to understand the number of ‘credit years’ required to get the full amount of the state pension:
- 30 years if you reach State Pension age on or after April 6, 2010, but before April 6, 2016, or 30 years if you reach State Pension age on or after April 6, 2010, but before April 6, 2016.
We recommend that you get counsel from an experienced professional before deciding to give voluntary contributions.
What counts as a full year for NI contributions?
The ‘new’ state pension will be available to those who reach state pension age on or after April 6, 2016. GOV.UK has more information about the new state pension. To get the entire amount, you’ll need 35 years of qualified contributions (you should be able to get a pro-rata amount provided you have at least 10 qualifying years).
A ‘qualifying year’ seems as if you’d have to work flawlessly for 52 weeks in order for it to count. In fact, any tax year in which you get a minimal level of earnings or credits (for example, if you are unable to work because you are raising children under the age of 12) might be a qualifying year for ‘Class 1’ NICs (payable by workers). You could ‘bank’ the 2021/22 tax year as a qualifying year if you earned the equivalent of 52 x £120 (the weekly Lower Earnings Limit) – a total of £6,240. Please keep in mind that any pay periods in which you earned less than the Lower Earnings Limit will be excluded from the total.
You may potentially make up a qualifying year by working 40 weeks for £120 and obtaining NIC credits for the remaining 12 weeks.
How can I make more National Insurance contributions to get a qualifying year?
If you go abroad but don’t have enough payments to make the year count, consider making ‘voluntary contributions’ ‘Class 3’ NICs. For the 2021/22 tax year, they cost £15.40 per week and help protect your state pension claim. More information about NICs can be found in our Tax fundamentals section.
Someone who did not work at all in 2021/22 may be required to pay £800.80 in Class 3 National Insurance contributions to make the year a ‘qualifying year.’ Someone who has worked for a portion of the year may be required to make fewer Class 3 payments and hence pay less.
Before you commit to costly voluntary contributions, check your NIC record on HMRC’s Personal Tax Account to discover how many qualifying years you have already accrued and your future potential to make up any gaps. This will assist you in determining whether or not voluntary donations are required.
HMRC’s booklet NI38 contains more information about NIC when traveling overseas. This also includes some useful information on health care in other countries.
If you elect to make voluntary Class 3 NIC contributions, keep in mind that they will not contribute towards contribution-based Jobseeker’s Allowance, which you may need to claim when you finish your studies if you are unable to find work. Only contribution-based Jobseeker’s Allowance is calculated using NIC paid on employment earnings in the previous two tax years (Class 1 NIC) (Class 1 credits may help you satisfy a part of the test). However, a non-contribution-based version (which is being superseded by universal credit) may be available, and it is calculated based on your entire financial condition.
Finally, if you work overseas for a foreign company, you may be required to pay foreign social security contributions, which are not usually refundable. Depending on which country you pay your social security contributions, they may be used to determine your eligibility for some social security benefits in the United Kingdom. This is known as the ‘aggregate principle,’ and it basically permits you to ‘top up’ your UK contributions with abroad social security contributions to meet UK obligations.
If you pay social security in a nation with a bilateral Social Security agreement with the UK, such as Canada, Japan, New Zealand, or the United States, the aggregation rules may apply. If you travel to such a country, you should contact the International Pension Centre for more information on the situation.
If you pay social security in an EU/EEA country, you can also profit from the aggregation principle. Despite the UK’s exit from the EU/EEA, the Withdrawal Agreement may allow you to benefit from full social security coordination (including the aggregation principle).
In fact, if you moved between the UK and the EU/EEA before 31 December 2020 and were subject to the legislation of the other country (in other words, a UK citizen who was subject to the legislation of an EU/EEA member state, or vice versa), you can continue to benefit from the aggregation principle for periods of insurance completed both before and after 31 December 2020.
You may benefit from the aggregation principle under the new UK-EU protocol on social security coordination if you travel between the UK and the EU for the first time on or after January 1, 2021.
More information is available in the government briefing on Brexit and the UK state pension, as well as EU guidelines on UK and EU citizens’ rights as contained in the Withdrawal Agreement.
Do self-employed pay both Class 2 and Class 4 NI?
National Insurance contributions (NICs) are a tax on earnings levied on the general population in the United Kingdom. This tax is used to determine if you are eligible for certain benefits, such as the State Pension and certain assistance allowances.
National Insurance is divided into ‘classes,’ with the class you pay based on your job position.
Employees under the age of the State Pension must pay Class 1 contributions if they earn more than £183 per week. The employer is responsible for deducting these contributions.
With a few exceptions, self-employed people pay National Insurance payments (NICs) in two classes: Class 2 and Class 4.
Should I pay Class 2 NIC voluntarily if I am also employed?
You must pay Class 1 NIC on your employed income and Class 2/4 NIC on your self-employed income if you are both employed and self-employed.
What is the difference between Class 1 2 3 and 4 National Insurance?
National Insurance is divided into four categories (or ‘classes’): Class 1 is paid by employees and employers, Class 2 is a flat rate paid by the self-employed (which is being phased out), Class 3 is voluntary contributions paid by people who want to complete their National Insurance record for benefit purposes but are not otherwise liable to pay National Insurance, and Class 4 is paid by the self-employed on profits over a certain threshold.
Unlike income tax, national insurance is only due by those aged 16 and over who are under the state pension retirement age. Prior to 2010, the state pension retirement age for women was 60 and for men it was 65. Since then, both men and women’s pension ages have risen. Visit https://www.gov.uk/calculate-state-pension for more information from Gov.uk.
HMRC’s internet pages on National Insurance can be viewed here for more information.