If you’re self-employed in the UK, understanding National Insurance Contributions (NICs) is essential. They might seem complex, but let us walk you through it…
NICs are a mandatory payment made by both employees and the self-employed to fund state benefits like the State Pension, Jobseekers Allowance, and Maternity Allowance. While employees have their NICs deducted directly from their wages, the self-employed are responsible for calculating and paying their own.
There are two main classes of NICs for the self-employed:
- Class 2 NICs: This is a fixed weekly amount that contributes towards your National Insurance record. It used to be mandatory, but from April 6th, 2024, it’s voluntary. However, paying it can be beneficial for certain benefits, such as Maternity Allowance.
- Class 4 NICs: This is a percentage of your self-employment profits above a certain threshold. It contributes to your State Pension and other benefits.
The amount you pay in Class 4 NICs depends on your self-employment profits. As things currently stand, those numbers fall into these categories:
Profits below £12,570: You don’t pay Class 4 NICs.
Profits between £12,570 and £50,270: You pay 9% Class 4 NICs on profits between these amounts.
Profits above £50,270: You pay 2% Class 4 NICs on profits above £50,270 on top.
You usually pay Class 4 NICs through Self Assessment. You’ll need to calculate your profits for the tax year and include the NICs on your tax return.
While no longer mandatory, you might choose to pay voluntary Class 2 NICs to protect your National Insurance record. This can be beneficial if you have gaps in your contributions or if you want to qualify for certain benefits.
And while NICs contribute to your State Pension, it’s essential to consider additional pension savings for a comfortable retirement. As ever, accurate records of your income and expenses are crucial for calculating NICs correctly.
If you’re wondering whether you’ve been doing this right, or if you’re starting to earn more and want to make sure you’re paying the right rates, then get in touch, and we can help you support your financial future.
