What are National Insurance Contributions (NICs)?
National Insurance Contributions (NICs) are paid by all over 16s in the UK if you are either:
- an employee earning above £8,632 in the tax year; or
- self-employed and making a profit (remember profit is income less expenses, because if you are self-employed, you are running a business) of £6,365 or more a year.
The idea is that you make contributions to gain access to certain government benefits - state pension, job seeker's allowance, maternity allowance etc.
The HMRC website is pretty good these days and talks you through NICs here: https://www.gov.uk/national-insurance. As always, we'll do our best to draw your attention to the bits most relevant for self-employed performers.
What are the different classes?
The class you pay depends on your employment status and how much you earn:
Employed (Class 1 NICs)
Paid by employees earning more than £162 a week. This gets taken out automatically from your salary and will appear on your payslip. You pay:
|Your pay||Class 1 National Insurance rate|
|£8,632 to £50,000 for the tax year||12%|
|Over £50,000 in the tax year||2%|
Self-employed (Class 2 and 4 NICs)
You usually pay 2 types of National Insurance if you’re self-employed:
- Class 2 if your profits are £6,365 or more a year; and
- Class 4 if your profits are £8,632 or more a year.
|Class||Rate for tax year 2019 to 2020|
|Class 2||£3 a week|
|Class 4||9% on profits between £8,632 and £50,000
2% on profits over £50,000
What if I do employed and self-employed work?
Unfortunately, you have to pay both if you do both. However, this is only true if you make the different earning thresholds - so it's a good thing really!
This all seems a bit complicated doesn't it?
We know! But the good thing is, you don't need to know any of this. It is all calculated automatically in your self-assessment tax return, which we walk you through in our Tax Return article.
We have had a couple of people ask us why they are paying NICs when they haven't earned enough money in a year, so we want to show you the bit of the tax return that catches some people out. On the below screen, HMRC calculates a Class 2 NICs value regardless of whether you have made enough money. Then at the bottom of the screen, it asks you if you want to pay voluntarily. You can select 'No' and you won't be charged.
We’ve skipped Class 3? Yes, because it’s a voluntary contribution. We think it is worth doing if you can afford it as it qualifies you for a full state pension if you pay for a certain amount of years but won’t go into it for now. If you want to know more about it though, just get in touch as per!
As always, we hope this makes sense and is easy to understand. But if we've missed something, you have a specific question or you're just darn right confused then just get in touch. We're all in this crazy business together and we love to hear from you!
Love Jo and James x