A guide to National Insurance for the self-employed

Superscript
22 December 2021
6 minute read

National Insurance has become a firmly established part of Britain’s taxation system since its inception in 1911. Today it forms the basis for the social benefit payments that make up the welfare state, from sick pay and parental leave pay to state pensions and the National Health Service.

Until 1975, all contributions to National Insurance were made at a flat rate but since then, the process of calculating contributions has become more complex. What you pay will depend on how much you earn and what kind of employment you undertake.

As with many aspects of the UK’s tax code, National Insurance is a more complex business for self-employed people than it is for employees who pay their taxes through the PAYE system. So, here is our guide to understanding how National Insurance works for the self-employed, how much you will be required to pay and how and when you go about making your contributions.

Who has to pay National Insurance contributions?

Given that you will be required to pay National Insurance contributions (NICs) on your earnings from the age of 16 until you retire, most people will be very familiar with the concept and how their NI contributions are deducted from their pay slip each month. Most employees on a pay-as-you-earn (PAYE) tax model will pay class 1 NICs and these will be deducted, along with your income tax, before your salary reaches your bank account.

Exemptions

Most workers between the ages of 16 and their retirement must pay National Insurance, however those earning less than the lower earning limit (£120 per week in 2021/22) do not pay National Insurance but are entitled to the benefits.

Also, married women and widows who opted into the Reduced Rate Scheme before April 1977 are eligible for an exemption from paying class 2 NICs (though they must still pay class 4 contributions).

Different classes of National Insurance Contributions

There are, broadly speaking, four classes of NICs:

  • Class 1 contributions from employees working for a company on a PAYE basis.
  • Classes 2 and 4 concern self-employed people
  • Class 3 concerns voluntary contributions (we’ll cover these later on)

Class 1

As a self-employed person, you won’t need to worry too much about class 1 contributions, unless of course you split your time between self-employed projects and a PAYE job as freelancers often do. In this case, your PAYE employer will deduct your class 1 contributions alongside your income tax directly from your pay before it reaches you.

For the 2021/22 tax year, you will pay class 1 contributions of:

  • 0% on earnings up to £184 per week (£9,568 per year)
  • 12% on earnings between £9,558 and £50,270 per year (rising to 13.25% in 2022/23)
  • 2% on earnings above £50,270

If you are employed by a company on a PAYE basis, your employer is required to make National Insurance contributions in addition to those that you make. These are known as:

  • Class 1A: 13.8% on all employee benefits, including private health insurance, company cars and redundancy payments over £30,000
  • Class 1B: 13.8% on all employee earnings above the secondary threshold (£8,840 in 2021/22)

Class 2

Class 2 contributions are payable by self-employed people and are made up of a flat rate of £3.05 per week for any self-employed person with net profits for the year over £6,515.

Class 4

Class 4 contributions are also payable by self-employed people and are calculated at:

  • 0% on net annual profit up to £9,558
  • 9% on profit between £9,558 and £50,270 (increasing to 10.25% in 2022/23)
  • 2% on profit over £50,270

How to pay

For employees of companies using the PAYE method, all your income tax and NICs are calculated according to your tax code and deducted automatically from your salary before it is paid to you. For self-employed people, the picture is a little more complex. As with income tax, your NICs are calculated based on your self-assessment return filed with HMRC each year.

Read our guide to completing your self-assessment return

When you enter the details of your self-employed earnings and allowable expenses for the year into your tax return, HMRC will calculate your net profit and, from that, your National Insurance contributions in both classes 2 and 4.

For example, if your self-employed business made £22,000 in gross turnover in the 2021/22 tax year, and accrued £10,000 in expenses, your net profit for the year would be £12,000.

  • Class 2 contributions (charged at a flat rate of £3.05 per week) = £158.60
  • Class 4 contributions (charged at 9% of profit above £9558) = £218.79
  • TOTAL National insurance bill = £377.39

The deadline for submitting your self-assessment tax return and paying the tax and National Insurance you owe is 31st January.

Finally, there are some circumstances in which you may be required to pay class 2 NICs but you will not submit a self-assessment tax return. For instance, if you are:

  • An examiner, moderator, invigilator or person who set exam questions
  • Running a business involving land or property
  • A minister of any recognised religion and you do not receive a salary
  • Living abroad and paying voluntary Class 2 contributions
  • Making investments, but not as a business
  • A non-UK resident who is registered as self-employed in the UK

In these cases, HMRC will contact you with a payment request by the end of October each year.

What if I miss a year of contributions?

Whether you work for an employer using PAYE or you’re self-employed, there may be periods in your working life when you are not earning and therefore not paying NICs. This can lead to gaps in your contributions record. These gaps can affect:

  • When you are able to draw a state pension
  • Whether you will be entitled to a full pension
  • Your ability to claim other working-age benefits

This problem is compounded for some self-employed people because the nature of freelance work means that some years you are likely to earn less than others, making your record of contributions patchy and potentially incomplete.

This is where class 3 contributions kick in to fill gaps in your record and allow you to still access the complete range of benefits, including a full state pension. Class 3 NICs are known as Voluntary Contributions and are a way for self-employed people who make less than the £6,515 profit threshold to voluntarily contribute and avoid gaps in their record.

Planned changes to National Insurance

As with many aspects of the UK’s taxation system, National Insurance is a constantly evolving set of calculations meaning that, year to year, the amount you will be required to contribute can change.

In response to both the Covid-19 pandemic and the longer-term crisis in social care funding, NICs in classes 1 and 4 will increase by 1.25% in April 2022 to directly fund the NHS and social care provision. Class 2 contributions will not change.

The NIC rates for self-employed people in the 2022/23 tax year will be:

  • Class 2: £3.05 per week for anyone with profits over £6,515
  • Class 4: 10.25% of profits over £9,558 and 2% of profits over £50,270

An example of the evolutionary nature of National Insurance came back in 2016, when the government proposed abolishing the flat-rate class 2 NICs for self-employed people and replacing it with one single and restructured class 4 NIC, allowing access for contributory benefits such as job-seekers allowance and bereavement benefit. This proposal was abandoned in 2018 and class 2 and 4 contributions remained as they were. However, calls for reforms to self-employed NICs continue and further changes cannot be ruled out in the future.

Key points

  • Self-employed people pay class 2 NICs if they’re profits are over £6,515 for the year
  • They pay class 4 NICs on all profits over £9,558 per year
  • National Insurance is calculated using the details of income and expenses you provide in your self-assessment tax return
  • Self-employed people are not required to pay class 1 NICs unless they also work for a company on a PAYE basis

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This content has been created for general information purposes and should not be taken as formal advice. Read our full disclaimer.

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