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?
Transfer of your business to a company - NIC issues
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 state pension age on earnings (but not pensions). This is currently 65 for a man. The state pension age for a woman is increasing from 60 to 65.
After state pension 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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You need to phone Jobcentre Plus on 0845 600 0643 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.
There is some very useful information on how to apply for an NI number on the GOV.UK website.
HMRC has now stopped issuing replacement National Insurance number cards but will still provide you with written confirmation of your National Insurance number if you ask for it.
However, if you have recently applied for a National Insurance number or are approaching age 16 and are eligible to receive a number automatically you will still be sent a National Insurance number card. This will continue for some time.
You do not need to have a National Insurance number card; it is your number that is important.
The written confirmation/card is not proof of identity or of a right to work in the UK.
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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 - £5,725 for 2013/14 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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These contributions are paid by the self employed. The amount you pay (£2.70 a week for 2013/14) is the same no matter what level of your profits are. There are various methods of payment. Use the link to check out How do I pay my NIC? and you can find out more information from HMRC.
As mentioned above if your profits are below £5,725 for 2013/14 - the Small Earnings Exception you will not need to make the payment.
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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 9% of your profits, if your profits are over a certain level (£7,755 for 2013/14). There is also an upper limit of £41,450 above which you pay further contributions of 2%.
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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These are voluntary contributions that you can pay if you do not pay Class 1 or Class 2 but you want to protect your rights to some state benefits.
You can use the link to read more about which benefits are affected by your NIC. Contributions for the current year can be paid monthly by Direct Debit or by quarterly payment request using other payment methods. Contributions for previous years can be paid in a lump sum. For 2013/14, the rate is £13.55 a week.
You can see how voluntary contributions work in the example Roger.
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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 £797 each week 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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Class 2 NIC From April 2011, payments for your Class 2 National Insurance contributions can be paid monthly or six monthly by Direct Debit or in response to payment requests issued in October and April by HMRC. For more information on the changes and the methods of payments have a look at the HMRC website.
Class 3 NIC for the current year can be paid monthly by Direct Debit or using quarterly payment requests using other methods of payment. The HMRC website explains the payment dates for current year Class 3 NIC. Contributions for previous years can be paid in a one off lump sum payment using one of the methods explained on the HMRC website.
Class 4 NIC Paid with the income tax on your profits through Self Assessment.
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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, disability living allowance
and personal independence payments child benefit guardian's allowance working tax credit and child tax credits income based employment and support 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) war widow's or Widower's pension pension credit. Use the following table to see which type of contribution counts towards which benefit:
| Benefit | Class 1 | Class 2 | Class 3 | | Maternity allowance | Yes | Yes | No | | Contribution based jobseekers allowance | Yes | No | No | | Incapacity benefit | Yes | Yes | No | | Contribution based employment and support allowance | Yes | Yes | No | | Widow's benefits (Widowed parent's allowance) | Yes | Yes | Yes | | Basic state pension | Yes | Yes | Yes | | Additional state pension | Yes | No | No | | Bereavement benefits (Bereavement allowance and payment | Yes | Yes | Yes | |
| Lars - low profits - small earnings exemption 2013/14 Lars is a self employed ice cream seller. Business has been poor for a couple of years and Lars thinks that his profits for 2013/14 will be around £4,500. In May 2013 Lars applied for Small Earnings Exception to apply for 2013/14 - the claim was accepted so he has not needed to pay any contributions during 2013/14. |
| Amy - working out 2013/14 Class 4 NIC During 2013/14 Amy made taxable profits of £15,660. Amy pays mandatory Class 2 contributions of £2.70 per week and she will also pay Class 4 NIC on the profits as follows: | | £ | | Profit | | 15,660 | | Lower limit | | (7,755) | | | £7,905 | | Class 4 NIC payable £7,905 @ 9% = £711.45 | | | |
| Ahmed - working out 2013/14 Class 4 NIC Ahmed is a self employed carpenter. In 2013/15 his profits will be £11,660. Ahmed pays his Class 2 NIC of £2.70 a week. He will also need to pay Class 4 NIC on his profits of £11,660. The NIC is worked out like this: | | £ | | Profit | | 11,660 | | Lower limit | | (7,755) | | | £3,905 | | Class 4 NIC payable £3,905 @ 9% = £351.45 | | | |
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I am thinking of incorporating my business. What are the NIC implications?
If you are self employed you pay Class 2 NICs (£2.70 a week for 2013/14), unless your earnings are below the small earnings exception (£5,725 for 2013/14). You will need to complete form CF10 if your earnings are below £5,725 in order to be exempt from paying Class 2 contributions.
Class 4 NICs are also payable if your profits exceed the lower profits limit (£7,755 for 2013/14). They are payable at a rate of 9% on profits between the lower profits limit and the upper profits limit (£41,450 for 2013/14) and at a rate of 2% on profits above the upper profits limit.
When the business is incorporated, you will stop being self-employed. Instead, usually, if you incorporate a business, you will be a director of the company that you create and therefore if you are paid a salary you will then become an employee of the company.
Your earnings, in the form of salary or wages and some benefits are liable to Class 1 NICs. Your company as your employer pays secondary Class 1 NICs on your earnings above the earnings threshold at the secondary rate (13.8% for 2013/14) and your pay primary Class 1 NICs on your earnings above the earnings threshold.
If you get any benefits from the company as your employer e.g. use of a car or fuel, a Class 1A liability, payable by your employer may arise on those benefits.
So overall this means that instead of paying flat rate Class 2 contributions plus Class 4 contributions on your profits, primary and secondary Class 1 contributions will be payable on your salary or wages or other earnings and Class 1A contributions may be payable if benefits in kind are provided.
It is very common for a company to pay dividends instead of a salary. This can have advantages and disadvantages for tax and NIC for both you and the company.
NICs are not payable on dividends as they are not considered to be earnings. This means a payment of a dividend can save NICs of 25.8% (13.8% employer contributions and 12% employee contributions) as compared to a payment of salary or wages. This is a considerable saving.
However it is not all good news! To maintain a contributions record and entitlement to the state pension and contributory pensions, you must be within the National Insurance system. If only dividends are paid, your earnings will be below the lower earnings limit for NICs purposes. A year in which only dividends are paid will not be a qualifying year and your contribution record will be affected.
There is a possible solution:
- NICs are payable at a zero rate on earnings between the lower earnings limit (£109 per week for 2013/14) and the earnings threshold (£149 per week for 2013/14). Contributions at the lower rate are sufficient to create a qualifying year without any associated NIC cost to either you or your employer.
- The solution is therefore for your company to pay you a small salary of between the lower earnings limit (£109 per week for 2013/14) and the earnings threshold (£149 per week for 2013/14). Additional money can be taken out in the form of dividends.
- The earnings attract NICs at the zero rate, but create a qualifying year for state pension purposes and entitlement to contributory benefits.
| Example James incorporates his business. He pays himself a dividend of £50,000. This has no associated NIC liability. However, if no NICs are paid for a year, the year is not a qualifying year and this may have implications for pension and benefit entitlement. If instead, James pays himself as salary of £500 per month (£6,000 a year) and dividends of £44,000 he will still pay out no NICs, but will get the benefit of having a qualifying year for NIC purposes. This is because his earnings are above the lower earnings limit (so he is in the NIC system) but below the earnings threshold (meaning he is not yet paying contributions at a positive rate). As an employer he must however, remember to operate payroll procedures and report to HMRC under Real Time Information (RTI) for PAYE. He must report to HMRC on or before each payday. This will ensure that his NIC record is credited. Form P60, which is given to all employees after the end of the tax year and is their record of the pay and tax deducted in the previous year, you will provide a summary of his pay and deductions for the tax year. You can find more information on operating PAYE in real time on the HMRC website. |
Where the route in the example for James is taken, it is important that you report to HMRC under RTI, even though no income tax or NIC may be payable. If you do not report the salary, your National Insurance record will not be updated and the benefit of the zero rate contributions may be overlooked. It does not matter that your company has nothing to pay over to HMRC. The salary must still be reported on or before the date of payment to ensure your NIC record is kept up to date.
For tax credits purposes, both salary or wages and dividends are counted as income - salary as income from your employment and dividends as investment income.
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