National Insurance and being self-employed
When you start a business of your own, be prepared to face a number of National Insurance implications. There are mainly two types of National Insurance that people, who are self-employed, have to make – the Class 2 and Class 4 National Insurance contributions.
Breaking it down – Class 2 National Insurance
If you earn more than £5,725 per year then you are liable to pay the Class 2 National Insurance contribution. These contributions are not too high. They boil down to just £2.70 per week. You can choose to pay them either monthly or after every six years or when requested to do so by the HMRC.
Given that the amount is minimal, this insurance provides basic cover which may allow you to claim incapacity benefits, but certainly not benefits on industrial injuries.
If your business does not surpass the stipulated amount, you need not pay this amount. However, in such a case, you need to possess a certificate proving the same. This is known as the certificate of Small Earnings Exception.
Class 4 National Insurance contributions
These contributions have to be paid while paying your income tax. Class 4 National Insurance contributions are usually arrived at by relying on your self-assessment tax return. These contributions have to be paid every year on the taxable profits your business garners.
If the profits of your business surpass £7,755, you will be subject to 9% of the amount. On the other hand, if your profits go so high as to exceed £41, 450, an additional 2% will be added to that amount.
Things to keep in mind
- Class 4 contributions do not give you any benefit entitlements
- Class 2 National Insurance contributions do not cover earning-related payment of pension nor do they provide bereavement benefits in the event of a spouse’s death
- If you have more than one business, there are separate rules that tell you the amounts you are liable to pay on the profits of your business
- In order to prepare yourself for Class 2 contributions, register yourself at HMRC at the time of registering your business