How much do you know about Class 4 National Insurance (NI) and the other kinds of tax you pay on any earnings and income when you start work?
The national insurance contributions you make help to pay for things like state benefits, statutory sick pay, maternity leave and various other employment perks that many of us may take for granted.
You pay NI whether you are self-employed or not, so long as you are at least 16 years old, work in the UK and are either:
- An employee earning more than £166 per week for 2019/20 and £169 per week for 2020/21
- Self-employed and making a profit of at least £6,365 per year for 2019/20 and £6,475 per year for 2020/21
In this blog post, we will be focusing on Class 4 National Insurance.
What is Class 4 National Insurance?
Class 4 national insurance contributions (NIC) are paid by self-employed individuals and partners in a partnership on profits they generate within the UK.
Class 4 contributions are essentially a profit-based tax; there is no attached benefit entitlement. The contributions are calculated according to the level of profits in a tax year.
‘Profits’ for Class 4 purposes includes all profits from a trade, profession or vocation conducted in the UK.
The calculation of profits for Class 4 purposes is made on the same basis as profits for income tax purposes.
If the profit you make as a sole trader at the end of the year is more than £8,632, you’ll need to make Class 4 contributions.
You will pay 9% on any profits between £8,632 and £50,000 and 2% on profits of over £50,000.
The amount you pay for your Class 4 NI contributions will be calculated at the end of each year as part of your Self-Assessment, though you’ll usually pay the amount due to HMRC every six months as part of what is known as ‘payment on account’.
How is Class 4 National Insurance paid?
Class 4 NIC is calculated and paid along with income tax liabilities, through the Self-Assessment system.
If you make payments on the account then your Class 4 NIC will be included when calculating the instalments.
If you do not pay your tax through payments on account then the Class 4 NIC will be due on 31 January, following the end of the tax year to which it relates.
Relative can help
Do you have a query related to National Insurance?
Give us a call on 01484 441431, or email our team on hello@itsrelative.co.uk. We are here to help.
Relative offer a creative approach to accountancy for creative business people.
We recognise that running a business often means wearing different hats and experience tells us that most of the time the financial advice you receive isn’t born from the same viewpoint.