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How much National Insurance will I pay as a sole trader?

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 2020/21.

What is National Insurance?

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:

  • 16 or over
  • self-employed and making a profit of £6,475 or more a year (for 2020/21).

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.

 

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How much National Insurance will I pay?

Self-employed individuals are liable to pay both Class 2 and Class 4 National Insurance. For 2020/21, the Class 2 rate is £3.05 per week where annual profits are in excess of £6,475.

For 2020/21 Class 4 national insurance is payable where annual profits exceed £9,500. Class 4 national insurance is payable on profits exceeding £9,500 at a rate of 9% until profits reach £50,000. Any profits in excess of £50,000 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.

  • Man studying iMac screen
    Rakesh buys and sells things online

    He has self employed profits in 2020/21 of £19,000. Class 2 will be due at £3.05 per week as profits are above £6,475. Class 4 will also be due as profits are above £9,500. The part of the profits that fall between £9,500 and £19,000 will attract Class 4 national insurance at 9%.

  • Electrician fixing fuse box
    Sandra is a self employed electrician

    Sandra has annual profits for 2020/21 of £51,000. Class 2 will be due at £3.05 a week as profits are above £6,475. Class 4 will also be due as profits are above £9,500. The part of the profits that fall between £9,500 and £50,000 will attract Class 4 national insurance at 9%. The remaining £1,000 of profit will be at 2%.

How and when will I pay National Insurance?

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 2022 for 2020/21. 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.

 

Mechanic working with machinery

Self employed tax and national insurance calculator

Use our handy calculator to find out how much tax will you will pay*

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Please note that the results you see on your screen are estimates only. This is based on base rates and does not include things such as student loans. For full details of tax allowances, please see our article on 2020/21 tax rates.

Please note that the results you see on your screen are estimates only. This is based on base rates and does not include things such as student loans. For full details of tax allowances, please see our article on 2020/21 tax rates.

Should I consider paying voluntary contributions?

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 £15 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:

  • 30 years if you reach State Pension age on or after 6 April 2010 but before 6 April 2016, or
  • 35 years if you reach State Pension age on or after 6 April 2016.

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.

 

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