National Insurance is one of the most confusing tax subjects when you start a business.
The tax that isn’t called a tax, it comes in many varieties.
It’s actually simple(ish) for a sole trader once you know what applies to you and what you need to do.
(and stay away from HMRC’s National Insurance tables which are helpful if you know what they mean and confusing as heck if you don’t).
Read on to find out:
Let’s begin with what is national insurance.
National Insurance (NI) started as a way to fund a new thing called the state pension and state help for low paid people, the ill and less able. These are called NICs (National Insurance Contributions).
It meant if you were old and couldn’t work, were ill and couldn’t work, or disabled and couldn’t work, you didn’t starve or die from lack of basic health care.
(To get political for a moment, this was common place right into the 1950s which isn’t a very long time ago. The conditions in Call The Midwife give you a good idea.)
This is why National Insurance is a tax that isn’t called a tax because originally it was spreading the cost of care for everyone. Now we still pay for care for everyone (until government dismantles it) but NI goes into general taxation, and general taxation pay for it.
Now wake up if I caught you snoozing, this is the important bit.
There are 5 kinds of National Insurance.
Class 1a, Class 1b, Class 2, Class 3 and Class 4. Class 1 is for employment (including if you have a limited company). Class 3 are voluntary contributions.
There are 2 kinds you pay as a self-employed sole trader: Class 2 and Class 4. (For more about self-employed NICs, read here.)
In this article, I’m focusing on Class 2 National Insurance. (This article is part of a series on all classes of National Insurance. Links at the end).
Class 2 National Insurance is paid by the self-employed (that’s all you sole traders) earning above a profits threshold of approximately £5.5k.
(If you don’t know what a sole trader is, read this).
Now, you may have heard of a thing called a Small Earnings Exemption Certificate.
This was in place until the tax year 2015-2016. If you declared your profits for the current tax year would be below the threshold, then you could have the certificate and not pay Class 2 National Insurance.
It’s been phased out and I’ll explain what happens now a bit later. (The government making tax easier? Catch me babe, I’m fainting :))
Class 2 National Insurance is a fixed rate of approximately £2.80 a week.
Once your taxable profits are above the Class 2 National Insurance threshold, then you’ll need to pay it.
(Remember, Class 2 has a different threshold to Class 4 National Insurance.)
You don’t need to memorise all these thresholds, so don’t worry. HMRC’s tax-calculating-hamster-wheel will do it for you.
Bookmark this article and you’re golden.
So that’s contributing to your state pension entitlement, maternity allowance and employment benefits for the price of a slice of cake.
I think you’ll agree it’s a bargain.
And in case you’re wondering, the other self-employed NIC (Class 4) contributes to bugger all except general taxation.
The important bit to remember is that every time you pay Class 2 National Insurance, you’re building up your entitlement to pregnancy pay, state pension and a few others (details here until the government reorganises the website again). Knowing that makes it sweeter when it comes to handing over the cash.
The longer answer is you won’t pay Class 2 National Insurance until your taxable profit is above approx £5.5k.
Remember, that’s your taxable profit, your actual profit will be lower. (You don’t get tax relief on all your business costs, so your profit for tax will always be lower than your profit).
You pay your Class 2 National Insurance by your tax return.
HMRC will calculate how much you owe and then you pay it as part of your overall tax bill. Easy.
Top tip: Remember that if you do your tax return earlier in the year, you don’t need to pay until 31 January.
(If you’re due a refund, the earlier you do your tax return, the earlier you’ll get your money. You won’t need to wait until January).
See, simples. Now it’s just your tax return to understand 🙂
If you need support doing your tax return, you haven’t done one before or you need an un-judgmental person to help you know what you need to know and hold your hand, have a look at my Tax Return Support packages.