Class 1 & Class4 National Insurance Contributions
National Insurance Contributions (NICs) are paid by almost everyone who works for a living and go towards paying for pensions, benefi ts and healthcare. Not paying your National Insurance Contributions puts your rights to benefi ts at risk.
If you are self-employed, there are two types of NICs you need to know about: Class 2 and Class 4 NICs:
This is a fixed amount of £2.40 per week, for 2009/10. We recommend you pay by monthly direct debit – you can do this either by fi lling in the Class 2 direct debit form when you register as self employed, or phoning the National Insurance Self-Employed Contact Centre on 08459 15 46 55. Otherwise, we will send you a quarterly bill. If you are in a partnership, or if your spouse is self-employed too, then each person pays their own Class 2 NICs.
What if you don’t earn much?
You can apply for a Small Earnings Exception. Visit www.hmrc.gov.uk/forms/cf10.pdf for details of the current threshold and how to claim.
If you do not apply for a SEE, you must pay Class 2 contributions from the start of your self-employment. You can always claim a refund if you fi nd out later on that your earnings are lower than expected, as long as you make your claim in writing no later than 31 January following the end of the tax year.
Class 4 National Insurance Contributions
These are also payable by most selfemployed people. They are calculated as a percentage of your annual business profit, but you only start paying Class 4 contributions when your profits reach a certain limit (which is £5,715 in 2009/10). Your Class 4 contributions are calculated alongside your income tax liability, based on the fi gures you report on your Self Assessment Tax Return. You pay the Class 4 NICs at the same time as your Income Tax. If you are in a partnership, or if your spouse is self-employed too, then each person pays their own Class 4 NICs.
If you employ staff, or are a director (and therefore an employee) of a company, you also need to know about Class 1 National Insurance Contributions which apply to employee earnings.
Class 1 National Insurance Contributions
This is payable by anyone who is employed and employers. If you are an employer, you are responsible for deducting Class 1 contributions from your employees and for paying your own share.
Class 1A & Class 1B National Insurance Contributions
These are payable by the employer, (and the cost of them is borne by the employer, and is not deducted from the employees’ salaries).
Finally, there are Class 3 National Insurance Contributions. These are voluntary payments, made by people who want to pay, and are entitled to pay, contributions to help them qualify for benefi ts. They cover shortfalls in your National Insurance contribution record and help protect your entitlement to State Pension and Bereavement Benefit.
Can you pay too much National Insurance?
Yes, it is possible. You might be paying too much National Insurance if, for example, you have more than one job. If you think that you will be paying too much in NICs overall, then you can apply to postpone (or defer) your Class 2 and Class 4 NICs until the end of the tax year. And if you do end up paying too much, HMRC will send you a refund. You can find out more about how to claim back overpaid NICs by visiting www.hmrc.gov.uk/nic/deferment.htm
To watch a short online video on ‘National Insurance for the self-employed’ visit www.businesslink.gov.uk/taxhelp