Earlier this month, it was announced that Class 2 National Insurance Contributions would not be abolished. It was due to be abolished in April 2019.
Initially the decision to abolish Class 2 National Insurance Contributions was intended to simplify the for the tax system for the self-employed and it was expected that its abolition would have seen an increase in Class 4 National Insurance Contributions.
In this weeks blog, we look at National Insurance and how much an individual will need to pay when they are self-employed.
When you are self-employed, there are two types of National Insurance you may have to pay. These are Class 2 and Class 4 contributions.
Previously, Class 2 National Insurance was paid outside of the tax return system whereby individuals paid a small amount to HM Revenue and Customs every week or month whilst Class 4 contributions were paid as part of your tax return. In recent years there has been a change so both Class 2 and Class 4 National Insurance contributions are payable as part of an individuals Self-Assessment tax return.
Class 2 National Insurance
Class 2 National Insurance is charged at a rate of £2.95 per week if your business profits are above £6,205 (2018/19 rates)
This is now payable on 31 January following the end of the tax year through your tax return.
Class 4 National Insurance
Class 4 National Insurance is based upon your self-employed profits and is not affected by any other sources of income you may have.
It is charged at a rate of 9% of profits between £8,424 and £46,350 and 2% for any profits above this. (2018/19 rates)
This is payable on 31 January following the end of the tax year through your tax return.
Illustration
If we consider an example where a sole trader with £55,000 of taxable profits for the 2018/19 tax year, the National Insurance payable would be as follows:
Class 2 National Insurance
52 weeks x £2.95 = £153.40
Class 4 National Insurance
First £8,424 of profits – £0
Next £37,926 charged at 9% = £3,413.34
Balance of £8,650 charged at 2% = £173.00
Total payable = £3,586.34
The total of both Class 2 and Class 4 National Insurance contributions payable on 31 January is £3,739.74 in addition to any income tax due on profits from self-employment.
Whilst individuals now are very comfortable with their understanding of tax rates and personal allowances, the calculation of National Insurance contributions is something that confuses individuals and is often omitted when calculating an estimated tax liability or tax refund.
If you require any assistance or require any further information, please do not hesitate to contact us on 0161 952 4244.