Self employed: Understanding National Insurance
You may be aware of National Insurance being levied against your income but perhaps do not understand fully how this tax is charged and the impact on your cash flow. This tax year has seen a NICs increase and upcoming a NICs payment threshold increase from 6th July 2022, how are you impacted?
What is National Insurance?
National Insurance contributions (NICs) are a tax on individuals and businesses who employ staff. NICs means that you can potentially qualify for certain state benefits, such as the State Pension and other support allowances.
Paying NICs on your income is mandatory, you cannot opt in or opt out, and is levied alongside income tax on your individual income.
National Insurance is split into ‘classes’ and the class you pay depends on your employment status as a UK taxpayer.
“If you a director you should aim to pay yourself a tax efficient salary each year at £12,570 from 6th July 2022 to avoid paying NICs and Income Tax, whilst retaining your State Pension Credits””
Self-employed National Insurance – how much do I pay?
If you are self-employed, it is likely you will pay any NICs due via your annual self assessment tax return.
You only start paying Class 2 NICs if your profits are £6,475 or more a year and Class 4 NICs if your profits are £9,501 or more a year.
There are some exceptions to this, including:
You earn income if you are under 16 years old or are over state retirement age
You won’t have to pay Class 2 NICs if you’re a married woman who opted into the Reduced Rate scheme before it ended in April 1977
There are different rules for fishermen and voluntary development workers
You may also not be required to pay NICs as a self employed person but may decide to make voluntary NICs contributions if you are in a certain job role, such as: examiners, moderators, and invigilators, religious ministers, providing that they receive no salary or stipend, people who make investments, but without receiving a commission or fee, and not as a business and some people whose business involves land or property.
The NICs rules can be complex, please get in touch to see how we can help.
Some people may also choose to make voluntary National Insurance contributions if there are gaps in your National Insurance payments record. When you have gaps in your record, this means you may have periods of time when you were not working and not paying NICs or perhaps your self employment profits were too small and below the thresholds during periods of self-employment to warrant NICs payments.
Gaps in your National Insurance record could impact how much you can receive for your State Pension You might do this if there are gaps in your National Insurance record that could affect your entitlement to the State Pension,
If you’re concerned that there may be gaps in your National Insurance record, you should ask for a copy using the gov.uk tool. You can then check whether you’re eligible to make voluntary contributions.
National Insurance has increased from April 2022
The government announced a 1.25% increase in NICs from April 2022, to help pay for health and social care.
To help stem rising living costs, there will also be an increase to the National Insurance payment threshold from 6th July 2022 to 5th April 2023, where the weekly threshold will increase to £242 per week or £1,048 per month.
