The Complete Guide to National Insurance as a Sole Trader

When starting a new venture as a sole trader, the legal paperwork and mandatory declarations can sometimes seem incomparably monotonous.

However, these tasks are essential in ensuring that you are performing within the legal framework of your industry.

One task that is often placed at the back of the to-do list but is an absolute must is working out how much National Insurance you will need to pay as a sole trader and the subsequent payment to the HMRC.

This task does not require an accountant or even an individual astute with numbers. It is in fact a very simple process that can be completed online in minutes and will ensure that you are acting within the laws as a sole trader.

Firstly, let’s discuss what national insurance is and why it is a mandatory requirement for every working individual and sole trader.

First, introduced in 1911 by the British Government, National Insurance is a system of tax payments that must be made by all working people in the country. The tax gathered is primarily used to fund state benefits.

The amount paid is dependent on a number of factors including the salary of an employee/employer and whether an individual is self-employed or not. Voluntary National Insurance contributions can also be made by those who may wish to protect their entitlement to benefits in the future.

In order to keep records of National Insurance contributions, the government give every child a unique NI number on or around their 16th birthday.

So, as a sole trader, how much National Insurance will you be required to pay?

If a self-employed individual is over 16 year’s old and earns more than £5,965 per year, they will be legally required to pay National Insurance contributions.

Self-employed individual are liable to pay both Class 2 and Class 4 National Insurance Contributions.

Class 2 contributions must be made if the individual is earning over £5,965 per year. Simply put, if you are eligible to pay National Insurance as a sole trader, you will be paying Class 2 contributions.

Class 2 contributions are currently set at £2.870 per week.

Class 4 National Insurance contributions are required if a sole trader is making profits of over £8,060. If an individual is eligible for this contribution, they will be required to pay their National Insurance at a rate of 9% on any profits over the aforementioned value, up to £43,000. Any profits after that will be eligible for a 2% reduction on rate.

For example, if a sole trader earns £25,000 profit In a year, he/she would pay 9% of that profit over £8,060 (£25,000-£8,060 = £16,940) to Class 4 National Insurance (9% of £16,940 = £1,524.60).

If mathematics is not your strong point, there are a number of online applications that will calculate for you how much National Insurance you will need to pay.

As a sole trader, you will need to get used to self-assessment forms, as you will be filling these forms out annually for tax purposes. Both your Class 2 and Class 4 National Insurance contributions will be included in your annual self-assessment form, and will need to be paid by the 31st January each year.

As a sole trader, it is recommended that you join a payment’s on account regime. This enables individuals to make two payments towards the forthcoming year’s tax bill, based on estimates of the previous year’s bill.

These payments include Class 4 National Insurance contributions but do not include Class 2 contributions, which will need to be made in a one-off annual payment, unless a payment plan has been previously agreed with the HMRC.

If you have gaps in your National Insurance contribution records, you can also make voluntary Class 3 National Insurance contributions. This will give you credit for certain entitlements during that payment period, including your state pension.

If you are unsure of whether or not to pay voluntary Class 3 contributions, speak to a professional, who should be able to tell you if it is a worthwhile venture.

There are a number of professions that are not required to pay Class 2 and 4 National Insurance contributions who may want to consider making voluntary contributions.

Individuals who run businesses involving land or property, religious ministers who do not receive a salary, moderators, invigilators and those who set exam questions and those who make personal investments or investments for others without receiving a fee or commission are not required to pay National Insurance contributions through self-assessment.

It is important to note that in 2018, Class 4 National Insurance contributions for sole trader’s would rise from 9% to 11%. This is a government attempt to bring self-employed National Insurance contributions in line with contributions payed by those under employment and subsequently pay their National Insurance via PAYE.

So, what happens when you first start as a sole trader?

Well, once you have informed the HMRC that you are now a sole trader, you will receive a quarterly bill for your Class 2 National Insurance contributions. As previously mentioned, your Class 4 National Insurance contributions will be included in your annual self-assessment

Those few people who work freelance roles whilst also continuing in full time employment may often be paying too much National Insurance. If you believe this is the case, you can apply for a deferment of contributions.  

So, there you have it. While it may seem like a complex process of legal paperwork and financial record keeping, it is actually an extremely simple process.

Class 2 contribution is a set payment, which you will be informed of if ever changed. Class 4 contribution simply requires one calculation from yourself at the end of every business year, which should take no more than 5 minutes.

There is no excuse for anyone to fall behind or forget to pay their National Insurance contributions. When self-employed, the HMRC want to make it as easy as possible for you to pay your taxes and national insurance and it certainly is just that.

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