How to Pay National Insurance for the Self-Employed?

Whether you decide to go solo as a contractor, freelancer or run a limited company, there are unarguably multiple pros of being self-employed, including more autonomy and control over work than working as a traditional employer. This guide provides a comprehensive overview of how to pay National Insurance for the self-employed, along with how to pay and potentially reduce your NICs for the 2024/25 tax year.

Moving ahead, with several upsides of being self-employed come a few downsides as well. For instance, while you are independent to execute your business tasks as per your flexibility, you will also have to perform the additional administration-related tasks single-handedly, such as filing your self-assessment tax returns, dealing with your own pension and paying your National Insurance Contributions.

While sorting out all the paperwork is necessary, understanding your National Insurance Contributions (NICs) as a self-employed individual is crucial to staying compliant with HMRC and securing your entitlement to state benefits, including the State Pension. 

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Understanding National Insurance Contributions (NICs) for the self-employed:

National Insurance Contributions play a pivotal role in funding various state benefits, and all individuals earning above specific thresholds are obligated to pay their NICs. It not only increases their state pension entitlement but also helps fund the NHS and other welfare services.

Notably, contrary to the Income Tax, National Insurance is only mandatory for people who are aged 16 or above and are below the state pension retirement age.

Furthermore, as a self-employed, if you are a sole trader, your NICs are categorized into different classes depending on how much profit your business generates annually.

By contrast, if you are employed as a director in your own limited company, your employment taxes (income tax and NIC) are deducted from your gross pay before the final or net salary hits your bank account.

These deductions are made through HMRC’s Pay As You Earn (PAYE) tax system. Nevertheless, by choosing the option of setting up a limited company under self-employment,  you can become its director and pay yourself a lower tax-efficient salary.

Consequently, you will pay little or no National Insurance by withdrawing most of your income through dividends.

Are you wondering if a limited company comes under the scope of self-employment?

You can read our following posts to gain an insight on the limited company:

What are the types of self-employed in the UK?

How to set up a limited company?

What are the filing obligations for a limited company?

How to pay National Insurance for the self-employed?

In order to comprehend how to pay National Insurance for the self-employed, you need to follow the following steps:

Understand the classes of NICs:

First and foremost, you must know which class of NIC will be applicable to your annual income to know how to pay National Insurance for the self-employed.

Which NIC class you will pay on your income is based on your taxable profits. Now, let’s discuss the NIC classes: 

Class 2 NICs: 

The current started on 6 April 2024 and will run till 5 April 2025. Accordingly, if your business produces annual profits of up to £6,725 or more, Class 2 contributions are considered paid to protect your National Insurance record.

Consequently, self-employed individuals will not have to pay Class 2 contributions. 

Class 4 NICs: 

However, when your profits surpass £12,570,  Class 4 contributions will apply to them. The rates of Class 4 NICs for the 2024/25 tax year are:

• 6% on profits between £12,570 and £50,270.
• 2% on profits over £50,270.

It is noteworthy that for 2024/25 tax year, the lower profit limit will be £12,570,  and the amount £50,270 is known as the ‘Upper Profits limit’.

To know more about NIC classes, visit the government website:

Calculate the National Insurance for the self-employed:

To determine your NICs, you will first calculate your taxable profits. 

You will get your taxable income by deducting/subtracting your allowable expenses from your gross income.

If you want to know more about the tax-deductible expenses a self-employed individual can claim back to cut down their tax bill, read our extensive guide:

What are allowable expenses for self-employed people in the UK?

Now, once you have calculated your taxable profits, you will apply Class 4 NIC rates:

• If the profits are between £12,570 and £50,270, you will apply a 6% rate to calculate your NIC.
• Conversely, if the profits are above £50,270, you will calculate your NIC by applying the 2% rate.

Let’s consider an example for better understanding.

Suppose your annual profit is £60,000.

Then, you will calculate the NIC due with the steps given below: 

• First, you will apply the 6% rate to the portion of profits between £12,570 and £50,270, such as

Taxable portion: £50,270 – £12,570 = £37,700

Payable NICs: £37,700 × 6% = £2,262

• Next, apply the 2% rate to the portion of profits that are above £50,270, like

Excess profits: £60,000 – £50,270 = £9,730

Hence, the NICs due will be =£9,730 × 2% = £194.60

• Thereafter, you will add up the total Class 4 NICs:

£2,262 (6% portion) + £194.60 (2% portion) = £2,456.60

• Lastly, for a self-employed individual with an annual profit of £60,000, the total payable Class 4 National Insurance will be £2,456.60 for the 2024/25 tax year.

Pay the National Insurance Contributions:

The most crucial step in understanding how to pay national Insurance for the self-employed is the registration of self-assessment with HMRC.

Generally, self-employed individuals in the UK, sole traders in particular, pay their NICs through the self-assessment system. 

To go into detail, by registering with HMRC for self-assessment, you notify HMRC about your taxable income, following which they will calculate your correct Income Tax and National Insurance you need to pay.

More importantly, HMRC calculates your Class 4 NICs annually as part of your Self Assessment since most NICs are made in your self-assessment. As a result, you pay your NICs along with your income tax. 

Lastly, after HMRC has informed you of the amount due (which includes both Income Tax and NICs), you will pay your bill.

It is worth highlighting that you must have your National Insurance (NI) number. It acts as your personal identification number in the social security system. It is essential because it ensures that your income tax and NICs are correctly recorded. 

In case you believe you do not have an NI number, or you might have forgotten it, you can apply for a new National Insurance number by going to the government website.

Fortunately, to facilitate the taxpayers, HMRC has allowed the income tax and NICs payments all be made online through their website. For instance, you can make the payment by bank transfer, a one-off direct debit, or a credit/debit card. 

Meet the deadlines for paying NICs:

It is essential for the self-employed to meet the deadlines to pay their NICs since delaying the payment or skipping the deadline can result in the imposition of penalties from HMRC.

Notably, your NICs will be due at the end of January for any contributions due from the previous tax year.

To explain, you must submit your online self-assessment tax return for the previous tax year and pay your accurate income tax and NICs by January 31.

Similarly, for Class 4 NICs, typically, you pay the amount due to HMRC every six months as part of your payment on account, i.e. on July 31 each year.

How to reduce NICs when self-employed?

The payment of NICs is a mandatory liability that you must discharge after learning how to pay National Insurance for the self-employed. However, there are a few legitimate ways you can manage or reduce your overall tax liability, such as:

• By claiming all the expenses that you incurred exclusively for your business, you can shed the weight of your tax bill (which comprises your income tax and NIC payments). Further elaborating, these expenses are indispensable to run your business, such as office costs, travel, and professional fees. Therefore, HMRC allows you to deduct these expenses from your total income to reduce your tax.
• Next, you can utilise available tax reliefs, like Annual Investment Allowance for equipment purchases, to cut down your tax bill.
• Also, contributing to a personal pension scheme can reduce your taxable income, which in turn will lower your tax and NICs liability.

Moreover, there are several other ways you can ensure tax-optimisation as a self-employed. Our following guide for tax-efficient ways will help you a great deal:

How to save taxes as self-employed workers in the UK?

Conclusion:

In the end, understanding how to pay National Insurance for the self-employed is vital to effectively manage your tax liabilities. However, what if your core business operations warrant your undivided attention, and you might not be able to juggle managing your tax liabilities and focusing on growing your business? It is where hiring a professional accountant is advised. 

The highly competent and skilled yet surprisingly affordable accountants registered with Accountingfirms can accurately calculate your tax liabilities, adhere to payment deadlines, and put forth legal ways to reduce your contributions.

Moreover, you can remain compliant with HMRC regulations and secure your entitlement to state benefits by letting an accountant manage all your tax affairs on your behalf.

Therefore, visit us today and start focusing on flourishing your business instead of dealing with the hassle of tax liabilities.

Find out more about self-employment by reading our comprehensive guides:

Everything you must know about what is self-employment.

What are the advantages and disadvantages of being self-employed?

Disclaimer: The information provided on AccountingFirms.co.uk is for informational purposes only and should not be considered as financial advice. Always consult with a professional accountant to ensure compliance with UK laws and regulations.