If you are self-employed, it is important to understand how, and when, you should pay your National Insurance contributions (NICs).
Unlike employees, who will usually pay both NICs and Income Tax through PAYE deductions from their gross salary each month, the self-employed process is different, and very much a do-it-yourself exercise.
Furthermore, recent changes have altered the amount you have to pay as self-employed individuals have seen cuts in NICs levels.
Read on to discover more about how NICs function for self-employed individuals, the level of contributions you should be making, and other important information.
There are different classes of National Insurance
NICs are effectively a tax on earnings designed to fund the UK benefits and social security system. The amount you are liable to contribute is based on your earnings if you are employed, and your profits if you are self-employed.
Paying NICs allows you to access certain benefits provided by the government including, most importantly, your State Pension.
There are currently three different types of NICs, known as “classes”:
- Class 1: Contributions made on any employed earnings you may have.
- Class 3: Voluntary contributions you can make to fill any gaps in your payment history so you can qualify for the State Pension.
- Class 4: Contributions paid on your self-employed earnings.
Class 2 NICs were previously a fixed weekly amount paid by anyone who was self-employed to ensure access to state benefits.
However, in his Autumn Statement in November 2023, the then-chancellor, Jeremy Hunt, announced self-employed people with profits above £12,570 would no longer need to pay Class 2 NICs. They still continue to get full access to entitlements.
The National Insurance rates you pay depend on your profits
The main Class 4 NICs rate for self-employed individuals in the 2023/24 tax year was 9%. This was then reduced to 6% in 2024/25.
A key point to remember is that the NICs payable are determined by your profits, not your total earnings. You will only be required to pay NICs if your profits exceed £12,570 in a year.
For example, if you have a profit of £55,000 in a tax year, your NICs will be a total of £2,356.60 made up of:
- £37,700 at 6% = £2,262
- £4,730 at 2% = £94.60
This calculation does not include any other allowances you may be entitled to.
If your profits are less than £6,725 in any tax year, you do not have to pay any NICs, but can choose to pay voluntary contributions of £3.45 a week.
The advantage of doing this is that it can help avoid having any gaps in your contribution history.
You pay self-employed NICs through your annual tax return
As you have already read, if you are self-employed, you pay NICs on the profit you make on your earnings rather than your total income.
Because of this, you pay your annual NICs through your self-assessment tax return each year, when you formally declare your earnings to HMRC. The deadline for doing this each year is 31 January following the end of the tax year in question.
However, we would normally recommend not leaving your return until close to the deadline. For one, the paperwork and data required may take time to collate and leave you struggling to meet the deadline.
Perhaps more importantly, completing your return well before the final date will mean that if you are due a refund of overpaid tax or NICs, you will benefit from having this in your account sooner.
You can make voluntary National Insurance contributions
The State Pension is probably not enough to live comfortably on, but it provides a useful underpin to your retirement income. This is because it is guaranteed for life, and it is protected by the “triple lock”, meaning it is designed to keep up with the rising cost of living.
The amount you will receive when you retire depends on the NICs you make during your working life. To receive the full State Pension, you will need to have at least 35 qualifying years of NICs.
You will only receive a reduced amount with fewer years of contributions, and you will not be eligible for any State Pension if you have less than 10 qualifying years of NICs.
It can make sound financial sense to maximise the amount of State Pension you will receive. So, if you do not have enough qualifying years, you might want to pay Class 3 voluntary contributions to boost your pension entitlement.
It is important to note that you only have until 5 April 2025 to buy back any missing years from 2006 to 2016. After this, you will be limited to the previous six years.
You should check on the government website to confirm your current State Pension entitlement.
You can claim a refund of overpayments through your tax return
It is always worth being aware that, as a self-employed person, you are more likely to overpay NICs than someone who is employed.
This is usually down to the fact that your earnings and profits calculations are often more complicated than employed people paid through an organised company payroll.
Because of this, it is always important to check that you are not overpaying. If at any stage you believe you may have overpaid your NICs, you should check with HMRC to see if you are due a refund.
The refund process will depend on your personal circumstances, and we would always suggest you take expert advice.
Get in touch
If you are self-employed and would like to talk about your financial planning arrangements, then please do get in touch with us at DBL Asset Management.
Email enquiries@dbl-am.com or call 01625 529 499 to speak to us today.
Please note
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
