Most people pay NIC on their profits - but do you know why you pay NIC and whether you in fact need to pay any contributions. We explain how NIC works in this part of the website and we also look at where to get an NI number and how to work out what you will pay.

We cover a number of topics here for anyone who is self employed. If you are employed please have a look at the NIC section in the employed part of the website.

What are National Insurance Contributions (NIC)?

How do I get an NI number?

Do I have to pay NIC?

What is Class 2 NIC?

What is Class 4 NIC?

What are Class 3 voluntary contributions?

I am employed and self employed so do I need to pay NIC on both my jobs?

How do I pay my NIC?

What benefits do my contributions pay for?

What are National Insurance Contributions(NIC)?

• National Insurance helps to pay for some State Benefits including retirement pensions. Your National Insurance earns you the right to receive certain benefits.



• You pay National Insurance Contributions (NIC) between the ages of 16 and retirement age on earnings (but not pensions).



• After state retirement age even if you have a job you do not need to pay any more contributions.



• A National Insurance number is unique to you throughout your life but it is not a form of identity. It is made up of 2 letters, 6 numbers and a final letter for example ZY 98 76 54 A.



• Everyone who wants to work in the UK must have a National Insurance number. To obtain a National Insurance number you must be over 16 and resident in Great Britain or Northern Ireland.



• You can start work without one but you must then apply immediately. The law requires you to apply for a number if you do not already have one and you are working or are intending to work.

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How do I get an NI number?

• You need to contact the Department for Work and Pensions (DWP) office nearest to where you live or work and ask for an appointment to be interviewed for an NI number. You will need to take some identity with you when you go but full details of this will be provided before your interview.



• You can find the telephone number and textphone number of the local DWP office in your telephone directory or Yellow Pages.



• There is some very useful information on how to apply for an NI number on the Department for Works & Pensions website.



• Once your application is successful you will receive a plastic NI card - take good care of this as it is your reminder of your NI number and you will need to use it when you contact the Revenue or DWP. As soon as you have your NI number you should tell the Revenue immediately.

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Do I have to pay NIC?

• Whether you are working for an employer or are self employed and working for yourself or for a partnership will affect the type of contribution you pay.



• If you are self employed you pay two types of NIC - one is a weekly stamp (Class 2) and the other is based on the level of your profits (Class 4).



• You can also pay voluntary NIC (Class 3).



• If you are self employed and you think your profits will be less than a set limit - £4,825 for 2008/09 you can elect not to pay any contributions during the year and then the position can be reviewed once you know what your profits were for that tax year.



• This is called a Small Earnings Exception. You can download the form you will need in order to claim the exception - form CF10 using the link.



• To see how the Small Earnings Exception works you can have a look at the example on Lars

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What is Class 2 NIC?

• These contributions are paid by the self employed. The amount you pay (£2.30 a week for 2008/09) is the same no matter what level of your profits are. There are various methods of payment. Click here to checkout How do I pay my NIC? and you can find out more information from the Revenue.
• As mentioned above if your profits are below £4,825 for 2008/09 - the Small Earnings Exception you will not need to make the payment.

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What is Class 4 NIC?

• Class 4 contributions are paid by the self employed in addition to Class 2 but they do not count towards any benefits.



• You will be liable to these contributions which amount to 8% of your profits, if your profits are over a certain level (£5,435 for 2008/09). There is also an upper limit of £40,040 above which you pay further contributions of 1%.



• Class 4 contributions are collected together with any income tax payable on profits through self-assessment.



• The examples on Amy and Ahmed show you how to work out your Class 4 NIC

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What are Class 3 voluntary contributions?

• These are voluntary contributions called Class 3 NIC you can pay if you do not pay Class 1 or Class 2 but you want to protect your rights to some state benefits.
• Click here to read more about which benefits are affected by your NIC. The contributions can be paid using the same methods as Class 2 or you can pay a lump sum at the end of the year. For 2008/09 the rate is £8.10 a week.
• You can see how voluntary contributions work in the example Roger

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I am employed and self employed so do I need to pay NIC on both my jobs?

• If you are both employed and self employed you need to pay both Class 1 NIC on your employed income and Class 2/4 NIC on your self employed income.

  However you may defer your Class 2 NICs if you are likely to pay Class 1 NICs on earnings of at least £770 each week (£3,337 each month) for the whole tax year.

  You may defer some of your Class 4 NICs if you can show that you are likely to pay too much in Class 1, Class 2 and Class 4 NICs. Form CA72B can be used to claim deferral for the current year. You can also download guidance notes on how to fill in the form from the HMRC website.

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How do I pay my NIC?

• Class 2 NIC Paid normally by quarterly bill or monthly by Direct Debit
• Class 3 NIC As for Class 2 or by making an annual lump sum payment
• Class 4 NIC Paid with the income tax on your profits through Self Assessment

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What benefits do my contributions pay for?

• For some UK benefits you need to have paid NIC contributions - these are called contributory benefits. There are other benefits where provided the rules for claiming apply to you, it does not matter whether or not you have paid any NIC.
• Benefits which do not depend on NIC include:
Attendance Allowance and Disability Living Allowance
Child Benefit
Guardian's Allowance
Income based Jobseeker's Allowance (JSA)
Industrial Injuries Benefits
Carer's Allowance (formerly Invalid Care Allowance)
Severe Disablement Allowance
Statutory payments (e.g. Statutory sick pay)

Use the following table to see which type of contribution counts towards which benefit:

Amy - working out 2008/09 Class 4 NIC During 2008/09 Amy made taxable profits of £15,000. Amy pays mandatory Class 2 contributions of £2.30 per week and she will also pay Class 4 NIC on the profits as follows: £ Profit 15,000 Lower limit (5,435) £ 9,565 Class 4 NIC payable £9,565 @ 8% = £765

Ahmed - working out 2008/09 Class 4 NIC Ahmed, is a self employed carpenter. In 2008/09 his profits will be £11,000. Ahmed pays his Class 2 NIC of £2.30 a week using the Quarterly payment scheme. He will also need to pay Class 4 NIC on his profits of £11,000. The NIC is worked out like this: £ Profit 11,000 Lower limit (5,435) £ 5,565 Class 4 NIC payable £5,565 @ 8% = £445

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