If you are sixteen and over, self-employed (sole trader or in a partnership), and making a profit befitting the ‘small profits threshold’, you are liable to pay national insurance.
The amount you pay is based on how much profit you make from your business. Being your own boss subjects you to:
Class 2 is a fixed rate of national insurance that must be paid from the point you declare yourself as self-employed, providing your profits are above the relevant threshold for the year. If your sole trader business has made a profit of more than £6,515 for the 2021/22 financial year, you are subject to a rate of £3.05 per week, £158.60 total for the tax year.
Be careful, these rates will change year on year. Remember to keep up to date on the latest via the HMRC website.
Class 4 national insurance is not a fixed rate but instead calculated as a percentage of your self-employed trading profits. For the 2021/22 tax year, if your business has made more than £9,568 in profit, you are liable for Class 4 national insurance of:
First, you need a national insurance number. This is like your personal identification code on the social security system made up of letters and numbers. It ensures national insurance contributions and taxes are recorded against your name only. It can be easily applied for online.
Class 2 and Class 4 national insurance are paid by most people through self-assessment. HMRC advises filing returns and paying your bill before 31 January each year. However, it is possible to get a waiver period to the 28 February. Failure to file your returns by the deadline results in a late filing penalty.
If you are not in a position to pay your national insurance through self-assessment, it is fitting to pay voluntary contributions.
You might be wondering ‘what’s in it for me?!’ Well, every payment you make benefits all of the below:
However, unlike normal taxation, the national insurance contributions you make can directly impact certain benefits you receive at different points in your life. We have put together the handy table that illustrates the main benefits impacted by the contributions you make:
|Benefits||Class 2||Class 3|
|Basic State Pension||Yes||Yes|
|Additional State Pension||No||No|
|Bereavement Support Payment||Yes||Yes|
|New State Pension||Yes||Yes|
|Contribution-based Jobseeker’s Allowance||Yes||No|
It is worth bearing in mind that Class 4 contributions paid by the self-employed do not tend to count towards state benefits.
Being both employed and having a side hustle, you will pay both Class 1 national insurance (for the employed), and either Class 2 or Class 4, depending on your business profits. Your combined income from all jobs will determine how much you pay.
Even if you continue working, once you reach the state pension age you can stop paying Class 2 national insurance. Nonetheless, you will continue paying Class 4 national insurance until the end of the tax year within which you reach state pension age.
The short answer…fines and penalties! Yes, it’s that simple.
HMRC will send you a Notice of Penalty Assessment, informing you in detail about the missed payment, the penalty, how to pay for the penalty and an appealing guide should you want to appeal. Following this, you will have to pay the penalty within 30 days. Wrong data on tax return, loss of life, sickness and disease, theft and crime, fire, floods, and natural disasters are a few of the reasons you can file an appeal.
Contact Spondoo for a full guide on self-employed rates for national insurance.