National Insurance: some common questions for the self-employed

Why am I paying two lots of National Insurance?
When going self-employed, it might appear that National Insurance is being paid twice.

National Insurance is grouped into different classes, and self-employed people pay Class 2 and Class 4. (In case you’re wondering what happened to Classes 1 and 3, Class 1 is for employees and Class 3 is for voluntary contributions if there are gaps in your record: more on this later.) Class 2 is a flat £2.75 a week and Class 4 is 9% of your profits over £7,956 and up to £41,865; anything above that attracts 2% Class 4 National Insurance. These rates, like all other rates quoted in this blog, are based on the rates for the 2014/15 tax year.

Have I got to pay National Insurance if I’m self-employed?
If you’re earning above certain amounts – yes. If you earn more than £5,885 a year you have to pay Class 2, and if you earn more than £7,956 you have to pay Class 4.

You don’t pay National Insurance if you’re aged under 16 or over the state pension age – currently 65.

If you earn less than £5,885 per year, you can apply for a “small earnings exception” and not pay any Class 2. However, paying Class 2 is the cheapest way of keeping your National Insurance record up to date and ensuring you’re entitled to state pension and other benefits. You are entitled to full benefits if you’ve paid Class 2 for a certain number of years, called “qualifying years”, as follows:

• men born before 6 April 1945 need 44 qualifying years
• men born on or after 6 April 1945 need 30 qualifying years
• women born before 6 April 1950 need 39 qualifying years
• women born on or after 6 April 1950 need 30 qualifying years

Do I still have to pay National Insurance if I have a private pension?
Yes.

What if I haven’t paid enough National Insurance?
If you suspect you don’t have enough qualifying years, you can first check with the Revenue by calling or writing to them, or completing a form online on their website https://online.hmrc.gov.uk/shortforms/form/NIStatement?dept-name=&sub-dept-name=&location=40&origin=http://www.hmrc.gov.uk

The statement will tell you how many years you are missing (if any) and how much in voluntary contributions it will cost to fill in the gaps.

I’ve heard how you pay Class 2 is changing – is that right?
To make the system more simple (and sensible), the Government is changing the way Class 2 National Insurance is paid. At the moment, Class 2 is invoiced by the Revenue and paid to them in a separate system from the rest of your tax. You may currently be paying the Class 2 on a monthly or six monthly basis. Class 4 National Insurance is paid at the same time as income tax in January (and sometimes July) each year. From the tax year starting in April 2015, most people will be able to pay their Class 2 liabilities along with the rest of their tax and Class 4 National Insurance.

This may mean that it will no longer be possible to pay Class 2 if your earnings are below the small earnings exception limit, resulting in low-earners having to pay the more expensive voluntary rates to keep their National Insurance record up-to-date. Watch this space for more details as they become available.

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