National insurance has had changes over the years but the fundamental concept is that it is a form of tax paid by workers (employees) and the self-employed to fund state benefits including the state pension.
If you are in employment, your employer will deduct national insurance on your behalf, if applicable, and pay this to HMRC, however when you work for yourself as self-employed it works differently.
The below rates are based on the 2018/19 tax year (6th April 2018 to 5th April 2019).
When you are self-employed, there are two types of national insurance you may have to pay – Class 2 and Class 4.
Previously Class 2 national insurance was paid outside of the self-assessment tax system, whilst Class 4 was paid as part of your tax return – however both Class 2 and Class 4 national insurance are now paid as part of your self-assessment tax return.
Class 4 National Insurance
This is based solely on your self-employed taxable profits.
It is calculated along with your self-assessment tax return and is payable at 9% of profits between £8,424 & £46,350 and 2% for any profits above this (2018/19 rates).
Class 2 National Insurance
In the past this was paid directly to HMRC (not as part of your tax return) but this is now paid through your self-assessment tax return.
It is charged at a rate of £2.95 per week if your business profits are above £6,205 (2018/19 rates).
Both of these national insurances are payable on 31st January following the end of the tax year, through your tax return. Class 4 NIC will also affect your payments on account for the following tax year whereas Class 2 NIC will not.
Example – National Insurance Calculation
Let’s look at an example of a self-employed sole trader with £45,000 of taxable profits for the 2018/19 tax year, their national insurance calculations would be:
Class 4 national insurance:
- First £8,424 of profits, £nil
- Next £36,576 charged at 9% = £3,291
- Total class 4 = £3,291
Class 2 national insurance
As the profits are above the class 2 threshold of £6,205 the class 2 national insurance is a fixed amount of £2.95 per week, x 52 weeks = £153
Total class 2 = £153
Total of both class 2 and class 4 national insurance = £3,444
If you need any further advice in relation to this topic please get in touch.