Paying National insurance if you’re a sole trader
Posted on 26th February 2021
Keeping up to date with your National Insurance contributions (NICs) will build up your state pension entitlement. Your contributions also help pay for the NHS and other services that you might need to rely on one day.
How your National Insurance is paid
As a sole trader your NI payments are based on how much profit you make. HMRC will work out how much you will pay based on your self-assessment tax (SAT) return. Every year in the Budget the threshold for NI payments is reviewed so, from 6 April, you should know how much NI is due.
When you’re an employee or you are paid as a Director of your own limited company your contributions are included in the pay as you earn (PAYE) scheme. In many cases Directors choose to pay themselves a lower salary and receive dividends from the company instead so that they pay little or no NI.
Your National Insurance number
Your NI number identifies you in the social security system and it’s used to make sure that your NI contributions and tax are properly recorded.
If you don’t know your NI number you can find it on your payslip from previous employment, your tax returns or any letters you have received about tax or benefits. You can also contact the National Insurance helpline on 0300 200 3500 and, by answering some basic questions, your number will be sent to you in the post.
Your National Insurance as a sole trader
When you register as self-employed this will cover your tax and NI.
As a sole trader, your NICs are different to those paid by people who pay their tax and NI through PAYE.
There are two main classes of NICs based on sole trader profits:
Class 2 NICs – payable annually at a weekly flat rate of £3.05
Class 4 NICs – payable as a percentage of your sole trader profits every six months as part of your SAT payments on account.
Class 2 NICs
For this tax year, you will pay Class 2 NICs if your sole trader business profits are more than £6,475, known as the ‘Small Profits Threshold’. If your profits are less than the Threshold you won’t pay any NICs.
Class 4 NICs
You will pay Class 4 NICs if your profit is more than £9,500, known as the Lower Profits Limit, of 9% on profits between £9,500 and £50,000 and 2% on profits over £50,000.
Class 1 (Employer’s) NICs
If your sole trader business has employees excluding subcontractors, freelancers or yourself, and they earn more than the earnings threshold for NI you will make employer’s NICs for them and deduct their employee’s NICs.
You can also make voluntary NICs, even if your profits are below the Threshold. This can help you to gain qualifying years towards your state pension entitlement, employment and support allowance, maternity allowance, and bereavement support payments.
You might want to pay voluntary contributions if you:
are close to State Pension age and don’t have enough qualifying years for a full State Pension
know you won’t have the qualifying years you need to get the full State Pension during your working life
have profits are below the Threshold or you live outside the UK, but you want to qualify for benefits.
Before deciding whether to make voluntary NICs you can check the number of qualifying years you have in the state pension scheme at www.gov.uk/check-state-pension.
Please get in touch if you would like to know more about NICs for sole traders.
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