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It’s not simple, but it is easy!
I’ll take you through National Insurance Contributions (NICs) step-by-step so you pay what you need to and no more than that.
National Insurance started last century as a way of paying for people’s health and welfare, instead of people literally starving to death or being dependent on the parish.
It’s got a bit more complicated since then and no longer is separate. It all goes into the same general tax pot.
It’s more complicated than that, however you get the gist.
You need to pay Class 2 NICs and Class 4 NICs.
HMRC will send you a Class 2 NICs bill every 6 months. It’s easier to pay by direct debit then you won’t forget. It is a tax bill after all. The amount isn’t high, around £140 a year.
The government is planning to include paying Class 2 NICs as part of your self assessment tax return so keep an eye out for that in future tax years.
With Class 1 NICs, you get credits towards state benefits like a state pension, sick pay and parental leave/maternity pay. You don’t get any benefit for paying Class 2 NICs. You just pay them.
One part of what I do with coaching clients is to look at their individual situation and help them understand how different business legal structures can effect your NI record. It’s very important if, for example, you want to claim parental leave/maternity pay in the next few years or if you have built up years of contributions.
Do you have multiple sole trader businesses? You only pay one ‘lot’ of Class 2 and Class 4 NICs.
Do you have a job and a business? Later I’ll explain how to check you aren’t paying too much NI. If your sole trader profits are super low, I’ll tell you about the exemption a bit later too.
Class 4 NICs kick in after an ‘allowance’, a bit like with income tax. The amount is lower than for income tax and also changes most/every year. It’s currently 9% of your profits for tax after the allowance has been applied. (Your actual profits will be lower).
If you have a job or other income which uses your NI ‘allowance’ (e.g. an occupational pension), then you will pay 9% Class 4 NICs on all your profits for tax up til the limit. I’ll explain about the limit later.
A photograph of cake to regain your attention. Keep focus!
When you register as a sole trader with HMRC, you should be automatically registered for Class 2 NICs.
Make a note in your calendar to contact National Insurance if you haven’t received a letter within a few months asking you to pay your Class 2 NICs.
If you’re a limited company director, I’ll cover that next. If you aren’t sure, read my post ‘Am I a sole trader or limited company?‘
You are legally employed not self-employed. Your company needs to pay Class 1 employer NICs and you as the employee need to pay Class 1 employee NICs.
If you are thinking this could be a lot, you’d be right. As a one man band limited company, you pay both.
That’s it! Well done.
I appreciate this is a bit of a brain stretcher. Work out what applies to you, get help if you need it, and then you’re done.
Next week, I’ll cover the question I know you’re asking, How Do I Pay Less National Insurance?