AN INTRODUCTION TO NATIONAL
INSURANCE FOR THE SELF-EMPLOYED
No. 239
March 2015
Introduction
National Insurance (NI) is a system of contributions paid by both
employed and self-employed people (trading as sole traders or
partnerships) that qualifies them for certain state benefits and
pensions such as the State Pension, Maternity Allowance and
Incapacity Benefit.
Employed and self-employed individuals pay different types of NI
contributions, which qualify them for different benefits. The amount
of NI paid by self-employed people varies according to how much
profit they make. Some individuals (whether employed or selfemployed) also choose to pay voluntary NICs, for example to protect
their State Pension if they have not otherwise made enough
contributions.
NI is paid to HM Revenue & Customs (HMRC), which tracks contribution
records via NI numbers.
Most self-employed people are required to pay flat-rate weekly Class
2 NICs (subject to certain exemptions), and some are also required to
pay Class 4 NICs, depending on the level of their profits.
This factsheet provides an explanation of the NI classes that are
relevant for self-employed people, including anyone who chooses to
make voluntary contributions, and covers who has to pay NICs, how
and when. It also explains the various financial thresholds relating to
the payment of NICs, how Class 4 NI is calculated, and the special rules
that apply to people who have earnings from both employment and
self-employment or who are running more than one business.
Class 2 NICs
Class 2 National Insurance is a weekly flat-rate contribution of £2.80
per week for the 2015/16 tax year (which runs from 6 April 2015 to
5 April 2016). Class 2 NICs qualify an individual for certain state
benefits, which are listed at www.gov.uk/national-insurance/whatnational-insurance-is-for.
Since April 2015 liability to pay Class 2 NICs has been determined by
HMRC based on the information included in an individual's selfassessment tax return. For more information about tax selfassessment, see BIF 264, An Introduction to Tax Self-Assessment.
All self-employed individuals (whether trading as sole traders or
partnerships), who are aged 16 and over, and are under state
retirement age, with net profits of more than the Small Profit Threshold
(£5,965 per year for 2015/16) become potentially liable to pay Class
2 NICs when they start to trade.
Anyone with profits of less than the Small Profit Threshold will not be
liable for Class 2 NICs but no longer has to claim an exemption in
advance, as was the case prior to April 2015.
Class 2 NICs qualify individuals for the State Pension and for certain
other benefits, so it is sometimes worth paying Class 2 NICs voluntarily
even where profits are below the qualifying threshold, for example
if an individual wishes to build up enough contributions to be able to
claim Maternity Allowance. However Class 2 NICs do not qualify
individuals for all state benefits, for example Additional State Pension
or Contribution-based JobSeeker's Allowance.
Class 2 NICs were traditionally paid by quarterly bill or monthly direct
debit, but the process changed in April 2015, when Class 2 NIC
payments became due annually in January each year, along with
income tax and Class 4 NIC self-assessment payments. There is more
about Class 4 NICs later in this profile.
Some self-employed people pay special rates of Class 2 NI. For
example, share fishermen pay £3.45 per week for 2015/16, and
Volunteer Development Workers (who work abroad for charities) pay
£5.60 per week.
For more information about the NIC rules relating to share fishermen,
go to www.gov.uk/share-fisherman-income-tax-and-nationalinsurance-contributions.
Class 4 NICs
Class 4 NICs are paid by self-employed people (both sole traders and
partnerships) and are calculated as a percentage of their profits
subject to certain thresholds, but do not count towards qualification
for any state benefits.
Self-employed individuals aged 16 and over are liable to pay Class 4
NICs until the start of the tax year after they reach state retirement age.
Class 4 NICs are calculated at 9% of profits between the Lower Profits
Limit (LPL), which is £8,060 for the tax year 2015/16, and the Upper
Profits Limit (UPL), which is £42,385 for 2015/16, plus 2% on any
profits above the UPL.
Class 4 contributions are calculated by HMRC using information
declared in an individual's annual tax self-assessment return, and are
paid along with the tax due for the relevant year.
There are special rules for people with more than one business who
may be able to offset losses from one business against the profits of
another when calculating the amount of taxable profits on which Class
4 NICs are due. For more information, go to www.gov.uk/government/
publications/more-than-one-business-hs220-self-assessmenthelpsheet.
Applying for deferment of NICs
People who have earnings from both employment and self-employment
can apply to defer payment of NICs to avoid overpaying, and can then
pay what is due at the end of the tax year. For more information about
deferring NIC payments, go to www.gov.uk/defer-self-employednational-insurance.
Payment of voluntary Class 3 NICs
Class 3 NICs are flat-rate voluntary contributions that can be made by
anyone who wishes to protect their entitlement to a State Pension or
certain other long-term benefits but have not made sufficient
contributions over the years, for example because they were out of
work but not claiming state benefits that would have provided them
with NI 'credits' towards benefits.
For the tax year 2015/16, Class 3 NICs are £14.10 per week.
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Hints and tips
•
All correspondence should include the correct NI numbers, as
this is one of the most common mistakes encountered by
HMRC.
•
Adequate provision should be made to save for payment of
NICs as these must all now be paid in a lump sum each January
together with income tax.
•
Making voluntary payments of NICs may be beneficial in the
long run, even for individuals who have low levels of profit,
as this may qualify them for future state benefits that they
would not otherwise be entitled to claim.
•
The Chancellor announced in the 2015 budget that the
Government intends to abolish Class 2 NICs in the next
Parliament, and will reform Class 4 NIC payments to introduce
a new contributory benefit. Further details of the changes will
be published by the Government later in 2015.
Further information
To access hundreds of practical factsheets, market reports and small
business guides, go to:
Website: www.scavenger.net
BIF 15 An Introduction to Tax, National Insurance and VAT
BIF 53 A Guide to Setting up and Running a Payroll System
BIF 483 A Guide to Tax Deadlines in 2015
Useful publications
'Tax and Tax Credit rates and thresholds for 2015-16'
HM Revenue & Customs (HMRC)
Website: www.gov.uk/government/publications/tax-and-tax-creditrates-and-thresholds-for-2015-16/tax-and-tax-credit-rates-andthresholds-for-2015-16#national-insurance-contribution-thresholds
Useful contacts
HM Revenue & Customs (HMRC) is the responsible for the collection
of taxes in the UK.
Website: www.gov.uk/government/organisations/hm-revenuecustoms
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CONTACT-
for further information.
AN INTRODUCTION TO NATIONAL INSURANCE FOR THE SELF-EMPLOYED
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This information is meant as a starting point only. Whilst
all reasonable efforts have been made, the publisher
makes no warranties that the information is accurate and
up-to-date and will not be responsible for any errors or
omissions in the information nor any consequences of any
errors or omissions. Professional advice should be
sought where appropriate.
© Cobweb Information Ltd,
9 Bankside, The Watermark,
Gateshead, NE11 9SY, Tel: 0191 461 8000
No. 239
March 2015