If you are in business as a sole trader or in a partnership, you are liable for self-employed National Insurance (NI) contributions. That generally means paying flat-rate Class 2 NI and profit-related Class 4 NI or voluntary Cass 3 NI.
Paying self-employed National Insurance contributions
You register to pay self-employed National Insurance contributions (NICs) as part of registering for tax self assessment.
Class 4 and Class 2 NI contributions are due at the same time as income tax payments and are both collected through self assessment - twice a year, by 31 January and 31 July.
You do not have to make Class 4 or Class 2 NICs if you are under 16 or have reached state pension age.
Class 4 NI
- Class 4 NI contributions are based on your level of profits. You must pay Class 4 NI if your profits are above the Lower profits limit (LPL) which is £9,500 in 2020/21 (£8,631 for 2019/20);
- You pay 9% Class 4 NI on profits from the LPL to the Upper profits limit (UPL) which is £50,000 for 2020/21 and 2019/20;
- You pay 2% on profit in excess of the UPL of £50,000.
If you have more than one business, special rules can apply to the calculation of Class 4 NI contributions in some circumstances - for example, if one of your businesses makes a loss.
Class 2 NI
Class 2 NI contributions are charged at a flat weekly rate of £3.05 (£3.00 for 2019/20) and affect your entitlement to some benefits, such as the state pension.
The small profits threshold applies if your earnings are below £6,475 fro 2020/21 (£6,365 for 2019/20). Where this is the case, no Class 2 NICs are payable and an exemption is no longer required.
Class 3 NI
You may have gaps in your national insurance record if, for example, you did not pay contributions because of small profits.
If you are eligible, you can voluntarily pay Class 3 NI contributions for the past six years to ensure you receive a State Pension. Check your NI record using your HMRC personal tax account to find out how much you need to pay.
Class 3 does not entirely make up for a Class 2 shortfall for all benefits. Class 3 does not give entitlement to Employment and Support Allowance, Maternity Allowance or Bereavement Support Payment.