Sole traders must register to pay self-employed National Insurance contributions with HM Revenue and Customs (HMRC). Sole traders pay Class 2 and Class 4 National Insurance contributions (NICs). This article gives you an overview of National Insurance for the self-employed and demonstrates how much National Insurance will be due by a sole trader for 2018/19.
National Insurance is a system of contributions paid to qualify for certain benefits including the State Pension.
As a sole trader you will pay National Insurance if you’re:
You need a National Insurance number before you can start paying National Insurance contributions. Self-employed individuals are liable to class 2 and class 4 National Insurance.
Self-employed individuals are liable to pay both Class 2 and Class 4 National Insurance. For 2018/19, the Class 2 rate is £2.95 per week where annual profits are in excess of £6,205.
For 2018/19 Class 4 national insurance is payable where annual profits exceed £8,424. Class 4 national insurance is payable on profits exceeding £8,424 at a rate of 9% until profits reach £46,350. Any profits in excess of £46,350 attract Class 4 National Insurance at a reduced rate of 2%.
Here are two examples showing how Class 2 and Class 4 contributions are calculated depending on the annual profits.
Both Class 2 and Class 4 National Insurance Contributions are calculated as part of the self-assessment process so will need to be paid by 31 January 2018 for 2016/17. Many self-employed individuals are under what is known as the payments on account regime.
This means they make two payments (estimates using last year’s tax bill) towards this year’s tax liability.
These payments on account will include Class 4 National Insurance but will not include Class 2. Class 2 will be paid all in one go when they pay their tax unless an individual agrees a voluntary spreading payment plan with HMRC directly.
You may choose to make voluntary Class 3 National Insurance contributions if, for example, you have gaps in your National Insurance record. Voluntary contributions will give you credit for that payment period towards certain state entitlements such as a credit towards the new flat rate state pension.
The Class 3 contribution rates are a lot higher than Class 2 at £14.25 per week.
If you want to review your national insurance credits to date, you can contact HM Revenue and Customs (HMRC). Note that from April 2016 the new flat rate pension applies.
It is important to be aware of the number of ‘credit years’ to be eligible for the full amount of state pension:
Before making a decision on paying voluntary contributions we recommend you speak to an experienced professional for more advice.
You can check the details of your National Insurance record here.
If you employ staff you are responsible for deducting the correct amount of national insurance from the payments made to your employees. In addition employer’s national insurance contributions must also be made.Read more
If you are self-employed you will pay your tax using a self-assessment tax return. This article will give you an overview of the self-assessment process and your legal obligations as a self-employed individual.Read more
Register or Login to add this article to your reading list.