The newly self employed and National Insurance

Published on 10 October 2005

Every day more and more people are starting up their own businesses. Most turn to HMRC for advice about how National Insurance works for the self employed and the Revenue leaflets in this area are, in the main, very helpful. However if you are reading one of their leaflets about when you need to register for Class 2 NIC and when a penalty can be charged for late registration you will actually be looking at a deadline which is simply expressed, but is not strictly correct.

From a sample of HMRC literature and forms set out below it clearly states that you must register within 3 months or leave yourself open to a potential penalty:

  • Are you thinking of working for yourself? - leaflet SE1
    Everyone starting out on their own needs to register with HM Revenue & Customs.....You must do this as soon as you start or within the first three months, even if you already use a Self Assessment tax return. There are penalties for not registering, so fill in the form at the back of this leaflet and send it to us right away.
  • Form CWF1
    If you delay telling us you are self-employed for three months or more you may have to pay a penalty of £100. If you know you are registering late, please tell us the reason for the delay on a separate piece of paper.
  • Leaflet CWL2 - National Insurance contributions for self-employed people.
    Class 2 and Class 4

    When you start working for yourself you must notify the Inland Revenue within three months, otherwise you may incur a £100 penalty. If you do not register and are not paying tax, you will be breaking the law and could be liable to further penalties.

 

What does the law actually say - well essentially it tells you, you should registerimmediately and that the deadline after which a penalty can be charged is worked out like this - you start with the last day of the month in which you are first due to pay NIC - and go on a further 3 months. A penalty can be charged on the first day after the end of these three months. Sounds complicated? It is easier to see in an example.

So if you start in business on 1 March 2010 - then the end of the first calendar month in which you are liable to pay Class 2 NIC is 31 March 2010. Three months hence would be 30 June 2010 and therefore a penalty could be charged on 1 July 2010. This is actually a period of 4 months since you commenced in business and not 3 months mentioned in the HMRC literature. In fact the period can vary from 3 to 4 months depending on the business start date.

 

The HMRC leaflets are essentially using a form of shorthand but this is not much use to you if you want to know exactly where you stand. So if you are starting up in business you might just want to take a copy of this article in case you find you are being asked for a penalty payment.

(10/10/2005)

Contact Name: Sue Jones (Tel: 0844 579 6700, Fax: 0844 579 6701)