National Insurance if you’re self employed – what do you pay?

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The chancellor said that the Budget announcement of a rise in National Insurance wouldn’t now go ahead. But what is the system of National Insurance if you’re self employed – how much do you pay?

Who pays National Insurance?

You pay National Insurance (NI) if you’re self employed and aged between 16 and state pension age. For women, the state pension age is rising from 60 to 66 and for men, the state pension age is currently 65, but will rise to 66 by 2020.

What classes of National Insurance do you pay?

If you’re self employed, you currently pay two different classes of National Insurance:

  • Class 2: This is a flat rate of National Insurance that you pay if you make more than £5,965 in profit in the tax year 2016 – 17. The threshold is called the small profits limit. Class 2 NI contributions are paid at a flat rate of £2.80 a week. Class 2 NI currently entitles you to the state pension, Bereavement Benefits, Maternity Allowance and contributory-based Employment and Support Allowance.
  • Class 4: This National Insurance is paid as a percentage of your profits. You pay 9% NI on profits between the lower profits limit. This is currently set at £8,060, and £43,000 (figures for 2016 – 17). You pay 2% on profits above £43,000. This doesn’t entitle you to any benefits but is designed to make sure self-employed people pay a fairer share of the costs of the benefits they’re entitled to.

SAVVY TIP: Your profits aren’t the same as your income or turnover. The profits are your income minus any expenses that you’re legitimately able to deduct.

If you are both employed and self employed, you may need to pay Class 1 National Insurance (for employment) as well as Class 2 and 4.

How you pay National Insurance

If you’re self employed, you normally pay your National Insurance when you pay tax as part of self assessment. If you don’t need to pay National Insurance, you may want to pay it anyway so you qualify for certain state benefits.

There are also some people who are self employed who don’t pay National Insurance via self assessment. They can pay voluntary National Insurance contributions if they want to. According to the Gov.uk website, they include:

  • examiners, moderators, invigilators and people who set exam questions
  • people who run businesses involving land or property
  • ministers of religion who don’t receive a salary or stipend
  • people who make investments for themselves or others – but not as a business and without getting a fee or commission.

Paying voluntary National Insurance

Even though you don’t have to pay Class 2 National Insurance if your profits are below £5,965 (in tax year 2016 – 17), you can pay voluntary NI. This entitles you to claim certain benefits.

Abolishing Class 2 National Insurance

In the spring Budget of 2015, the chancellor said that Class 2 National Insurance contributions would be abolished. People who are self employed will only pay one class – Class 4. Class 2 NI is due to be abolished in April 2018.

This means that self-employed people who currently have modest profits (below £8,060 in tax year 2016 – 17) wouldn’t pay Class 4 National Insurance after April 2018. They would be able to make voluntary Class 3 National Insurance, but this is much more expensive than Class 2.

After consulting on this issue, the government says that after Class 2 NI contributions have been abolished in April 2018, if you have profits between the small profits limit and the lower profits limit (namely, between £5,965 and £8,060 in tax year 2016 – 17), you will be treated as though you have paid Class 4 NI contributions.

SAVVY TIP: This is important because it means you’ll be able to claim benefits that are based on your NI contributions record.

Class 3 NI contributions, which is the class of National Insurance that you can pay voluntarily to protect your entitlement to the state pension and bereavement benefits, will be expanded so that you’ll also be entitled to the standard rate of Maternity Allowance and contributory-based Employment and Support Allowance if you’re self employed.

Related articles:

National Insurance credits – NI credits could increase your state pension

How easy is it to get a mortgage if you’re self employed or have a limited company?

Your rights if you’re employed, self employed or a worker

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