National Insurance Deductions

National Insurance

As an employee, your employer deducts National Insurance contributions from your wages and pays it to HMRC. However this is not the same if you work for yourself. When you are self-employed you are responsible for paying your National Insurance contributions to HMRC. There are two types of National Insurance contributions that you may have to pay:

  • Class 2
  • Class 4

HMRC used to collect Class 2 by Direct Debit or a half yearly bill. This has changed and from April 2015, most self-employed people will be able to pay their Class 2 National Insurance contributions through their Self-Assessment tax return on the same bill as any Income Tax and Class 4 National Insurance contributions that are due.

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You must pay Class 2 contributions for each week that you are registered as self-employed. This includes weeks when you are on holiday or have no work

What do National Insurance contributions count towards?

Paying Class 2 National Insurance contributions counts towards certain benefits like:

  • Basic State Pension
  • New State Pension
  • Maternity Allowances
  • Employment and Support Allowance
  • Bereavement Benefits
  • But doesn’t count towards;
  • Additional State Pension
  • Job Seekers Allowance

When you don’t have to pay Class 2 National Insurance contributions

You do not have to pay Class 2 National Insurance contributions if:

  • You are under 16
  • You have reached state pension age
  • Your earnings are below the Small Profit Threshold.

Even with a small profit below the threshold, some people still choose to pay Class 2 voluntarily to build up their record for benefit purposes. This is collected through the Self Assessment system when you enter your business profits.

Class 4 National Insurance contributions

As well as paying Class 2 National Insurance contributions, you may have to pay Class 4 National Insurance contributions. Unlike Class 2 National Insurance contributions, Class 4 National Insurance contributions is not a flat rate. The amount of Class 4 National Insurance contributions you have to pay is based on your taxable profits above a certain limit, and is payable at the same time as your tax under Self Assessment.

That completes this section on National Insurance for the self-employed. Let’s review the key points:

  • there are two types of National Insurance contribution that you may have to pay when working for yourself; Class 2 and Class 4
  • Class 2 is a flat rate amount
  • Class 4 is based on your taxable profits above a certain limit