Anyone who is self-employed is responsible for paying National Insurance contributions, which are based on their income. In order to accurately calculate how much you must pay each tax year, it’s vital to keep detailed records of your business income and outgoings. In the following sections, we’ll explain what National Insurance is, how it’s calculated and how you pay.

What is National Insurance?

National Insurance is used to fund state pensions and other benefits, such as Universal Credit. Some benefits are contribution based, which means you can only claim them if you have made a certain type and level of National Insurance contributions. The principle is the same as that applying to other types of insurance, such as your car or home insurance policy – everyone pays in, and then those who need help will be able to make a claim.

Which self-employed people pay National Insurance?

The majority of self-employed people will pay what are known as Class 2 National Insurance Contributions (NICs). For the 2020-2021 tax year, for example, any self-employed person earning in excess of £6,475 will pay Class 2 NICs. This differs from the threshold for income tax, which is based on the personal allowance. By contrast, the standard personal allowance for 2020-2021 is £12,500, meaning you can earn this sum without being liable for income tax.

If you earn over £6,475 in the 2020-2021 tax year, for example, you will pay £3.05 per week in Class 2 NICs. This equals £158.60 per annum for the same tax year.

If your profits exceed £9,500 for 2020-2021, you will be liable for Class 4 NICs, in addition to Class 2 NICs. This means that 9% is payable on any profits you make that are between £9,500 and £50,000 in the 2020-2021 tax year. Any profit over £50,000 becomes liable for Class 4 NICs payable at a rate of 2%.

Voluntary Class 2 Contributions

If you are self-employed but earning less than the threshold, you can choose to make voluntary National Insurance contributions. This can help to avoid any gaps in your record that could affect your future state pension or entitlement to certain benefits.

How do I pay National Insurance?

National Insurance is paid at the same time as income tax, via the Self Assessment tax return that is submitted for each previous tax year. Paper tax returns are due earlier than those completed online. For the 2019-2020 tax year, your tax return must have been submitted to HMRC by 31st October 2020 for paper returns. If you’re completing Self Assessment online, then you have until 31st January 2021 to complete it.

When completing your tax return, your total income and outgoings must be detailed. Once it has gone to HMRC, the tax authority will calculate the income tax and National Insurance you must pay and notify you of this.

If you need help with your tax return or any other aspect of your finances, we’re here to help at Adaptive Accountancy.