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Mastering National Insurance if you’re self-employed

If you don't pay National Insurance, you won't be entitled to a state pension of approximately £800 per month, tax-free, when you retire. For self-employed tradespeople, though, there's a slight twist on these rules.

Managing your finances is an important part of running a successful business. So too is understanding how national insurance (NI) contributions apply to you when working as a tradesperson.

Looking to brush up on the accounting side of your business? Then read on.

This guide takes you through everything you need to know about NI, including:

  • How to register self-employed national insurance; and…
  • How you can stay on top of your finances in this area.

In a hurry? Then scroll down to the FAQs below for some quick-fire answers.

Do self-employed people pay national insurance?

Paying national insurance tax entitles you to a state pension, and other unemployment benefits. Just like employers and workers, self-employed people can be required to pay national insurance contributions (NIC).

However, it only applies if you make a profit of £6,725 or more per year. If this is the case, you’ll be required to pay self-employed NI until you reach the state pension age.

How much national insurance do I pay self-employed?

How much NI you pay will depend on what class you fall into. If your profits go over £6,725, you’ll have to pay a Class 2 national insurance contribution of £3.15 a week. Whereas if your profits are over £9,881, you will then have to pay Class 4 national insurance as well as Class 2.

In the instance that your profits fall into the Class 4 category, your payments can still vary depending on how much you make. The initial rate starts at 10.25% on profits between £9,881 and £50,270 – and then 3.25% on profits over £50,270.

Meanwhile: if you work for an employer but also have your own self-employed income on the side? When it comes to national insurance in this instance, it’s best to visit the HMRC site and find out your official employment status. It’s also worth checking out our freelancing taxes guide here for more helpful advice.

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Voluntary national insurance

Keep in mind that if you’re self-employed and don’t pay NI, you can still choose to make voluntary payments to fill any gaps in your NI records. These would fall into the Class 3 bracket. Gaps can happen due to you:

  • If you’re unemployed and not claiming any benefits
  • Should you have been employed but not earning enough to pay national insurance
  • For those who are self-employed but not making enough profit to pay national insurance
  • When people have been living abroad

You can check for gaps in your records and if you’re eligible to make voluntary contributions by visiting the UK government website.

You might also choose to make voluntary contributions to get a higher state pension. Keep in mind that you’ll need to have 35 qualifying years of NI contributions to receive the full pension and a minimum of 10 years to receive a reduced pension.

If you had small profits at certain points in time while running your business, you could decide to make voluntary NI payments in this instance. Class 3 contributions can be paid at a weekly rate of £15.85.

How to make your national insurance when self-employed?

NI is usually paid through your annual self-assessment tax return which reports your untaxed income to HMRC. This will take into account all ingoings and outgoings for your business from the past year.

You can fill out and submit your self-assessment form online through the HMRC website. It’s vital that you document your financial records on a regular basis not only to make your life easier but also so you can complete the form properly.

If you’re a sole trader, you’ll need to bookkeep:

  • Your expenses
  • Invoices
  • Other business income from selling off assets like equipment or property

If you manage a limited company, you’ll need these plus a few extra documents including:

  • Your P60 – this shows the tax you paid in the past tax year
  • Your P11D – this is only applicable if you have employees who get certain benefits like a company car, for example

Don’t forget to keep an eye on the deadlines for filing your self-assessment form. This is usually around October. But it’s best to double-check so you know the exact dates. If you’re struggling to keep on top of finances, it might be a good idea to hire an accountant for help. For more information on accountancy services, read our article here.

If you miss the deadline, you could be fined by HMRC. This is usually £100 for three months’ delay and can rise if you wait even longer. So make sure you complete your tax return on time. Bear in mind that it generally takes between five days and eight weeks for HMRC to process a self-assessment. So it’s best to complete your form sooner rather than later.

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Is there any difference between limited company national insurance versus sole trader national insurance?

There is a slight difference in how NI works. This depends on your business’ structure. Sole trading means you’ll be paying Class 2 or Class 4 contributions depending on your profits. As a limited company, on the other hand, you’ll have to pay the employer’s Class 1A or 1B National Insurance on salaries and staff as well. For more information on running a limited company, check out our guide here.

What benefits do my NI contributions pay for?

NIC pay for several benefits including:

  • Maternity Allowance
  • Contribution-based/New Style Jobseeker’s Allowance (JSA)
  • Contribution-based/New Style Employment and Support Allowance (ESA)
  • Bereavement Benefits
  • Basic State Pension

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