National Insurance for the Self-Employed

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National Insurance for the Self-Employed

By Stacey McVeighty | Thursday, 26th June 2014

So, you’ve taken the leap and you have registered with HMRC as Self-Employed. What happens next? Well there are a number of things that you (or your accountant) need to do and that HMRC will do. In this piece I am focussing on National Insurance. Once you register as self-employed, HMRC will send you a letter (OK, it’s a bill) in respect of your self-employed National Insurance contributions. There are many types of National Insurance. HMRC has made our lives easy and called them sensible things like employee national insurance, self-employed nati...don’t be silly, of course it hasn’t, the rather unhelpful names are listed below:

  • Class 1 NI. This is employee national insurance that is deducted from your employee salary. This contributes to your basic state pension, your additional state pension, to contribution-based jobseekers allowance/employment and support allowance, and maternity allowance.
  • Class 2 NI. This is a contribution that self-employed people may make. It contributes to the basic state pension, maternity allowance, and employment and support allowance.
  • Class 3 NI. This is voluntary national insurance. It contributes to the basic state pension. You may want to discuss this if you know someone who has made some national insurance contributions during their working life but not quite the “full-house”.
  • Class 4 NI. This is another type of national insurance that only self-employed people make.  This doesn’t contribute to anything. It is basically another tax that HMRC dish out to self-employed people.

The rates and thresholds for these contributions can be found on the HMRC website. The important thing to know about National Insurance is that some people do not have to pay it or may not have to pay the full percentage. For example, you do not have to pay Class 2 National Insurance if you are over the state pension age or if your profits from self-employment are under £5,885 (2014/15). You should speak to your accountant or contact Change Accountants if this applies to you. You only pay Class 4 contributions when your profits from Self-employment are over £7,956 (2014/15) and if your profits are above £41,865 (2014/15) you pay a reduced rate of 2%. Again you do not have to pay Class 4 national insurance once you reach state pension age. If you are employed and self-employed, you may be paying too much national insurance. Your accountant should review this as part of your tax return process and you should be able to get a refund for the overpayment. Contact Change Accountants if you would like help with this.