Class 4 National Insurance is a tax that self-employed people in the UK must pay if they earn profits over £12,570. The government uses the proceeds of the tax to fund state benefits like the NHS, and pensions. This type of insurance is the equivalent to class 1 National Insurance tax that is paid by workers who are paid by an employer.
The amount of class 4 National Insurance due will be calculated during the process of filing in the annual self-assessment tax return that self-employed people need to submit to HMRC.
Read on for more detail on Class 4 National Insurance, how to calculate it and how it’s paid.
What are National Insurance Contributions?
National Insurance Contributions (NICs) are taxes that the government uses to fund certain state benefits in the United Kingdom. The eligibility criteria to enjoy these benefits is to have made NIC’s for a set number of years. Essentially you’re paying into the system to be able to take out of it when you need to.
Every resident of the UK who is employed or self-employed must pay National Insurance Contributions. The amount is not general but depends on your income and employment status. As a result, unemployed residents are exempt from paying NICs but anyone who is eligible but evades the payment is liable to criminal prosecution.
Classifying Yourself for National Insurance
There are three main categories for everyone who pays National Insurance. We have employed, self-employed and voluntary people.
Employed – individuals with gainful employment should pay National Insurance through their PAYE (Pay As You Earn) tax code. Your employer will manage this on your behalf.
Self-Employed – a self-assessment tax return is expected from every self-employed person to inform HMRC of their taxable income and National Insurance contributions.
Voluntary – individuals who are not employed are not mandated to pay National Insurance. However, you could decide to voluntarily make the payments in order to build up your entitlement to qualify for state benefits like a pension later in life.
What is Class Four National Insurance?
Class Four National Insurance is tax payment by the self-employed people in the UK. The Class 4 taxes are similar to other types of NICs since the government uses them to fund state benefits. The amount paid varies for everyone depending on how much annual profits are declared through your self-assessment tax return.
Self-employed people need to declare their interests since there is no way HMRC has direct access to their earnings to deduct taxes. They have to provide profit records through the self-assessment form compared to the traditional employment jobs that use the PAYE system to calculate and automatically pay.
Who has to pay Class Four National Insurance?
Self employed people, partners in businesses and sole traders must pay class 4 National Insurance once profits exceed a set threshold.
For tax year 2023/24, for profits between £12,570 and £50,270 you would pay 9% in class 4 contributions. For profits over £50,270, you are required to pay 2% in National Insurance class 4 contributions.
Examples of Class 4 NICs
Here are some practical examples of how to calculate your Class 4 National Insurance Contribution.
- David is a freelance photographer who earns £9,500 profit annually from his job. Since the profits are below the £12,570 personal allowance threshold, he is not mandated to pay a Class 4 NIC. However, David is eligible for Class 2 NIC which is a different National Insurance payment that is explained in more detail later in this post.
Calculation:
- Profits subject to 9% rate = £50,270 – £12,570 = £37,700
- Class 4 NICs = £37,700 x 9% = £3,393
- Sarah is a self-employed web developer with annual profits of £30,000. For profits between £12,570 and £50,270, she is required to pay 9% in Class 4 NICs.
Calculation:
- Profits subject to 9% rate = £50,270 – £12,570 = £37,700
- Class 4 NICs = £37,700 x 9% = £3,393
- John is a successful self-employed consultant with annual profits of £75,000. For profits between £12,570 and £50,270, he pays 9%. For profits over £50,270, he is required to pay 2% in Class 4 NICs.
Calculation:
- Profits subject to 9% rate = £50,270 – £12,570 = £37,700
- Class 4 NICs on this portion = £37,700 x 9% = £3,393
- Profits subject to 2% rate = £75,000 – £50,270 = £24,730
- Class 4 NICs on this portion = £24,730 x 2% = £494.60
John’s total Class 4 NICs = £3,393 + £494.60 = £3,887.60
Class 2 National Insurance
Class 2 National Insurance is another tax levied on only self-employed people in the United Kingdom. Like the Class 4 NICs, the proceeds of Class 2 NICs go into funding state benefits like pensions.
The eligibility criteria are for self-employed people who make over £6,725 annual profits. Class 2 NICs is a flat rate payment of £3.45 weekly or £179.40 annually.
Looking at the examples we used above, for class 2 contributions, David earns £9,500 profit annually as a freelance photographer. Since his profits exceed £6,725, he is eligible and required to pay the flat rate Class 2 NIC of £179.40 annually (or £3.45 weekly).
Sarah is a self-employed web developer with annual profits of £30,000. Her profits also exceed the £6,725 threshold, so she must pay the full Class 2 NIC of £179.40 annually in addition to her Class 4 NIC of £3,393.
John is a self-employed consultant with £75,000 annual profits. Like David and Sarah, since his profits are over £6,725, he needs to pay the standard Class 2 NIC of £179.40 per year in addition to his Class 4 NIC amount of £3,887.60.
So in all three cases, because their annual self-employment profits exceeded £6,725, David, Sarah and John are all required to pay the flat rate Class 2 National Insurance contribution of £179.40 for the 2023/24 tax year to accumulate qualifying years towards their State Pension and certain benefits.
The Class 2 amount of £179.40 is the same fixed annual amount regardless of their differing levels of profits, as it is a flat rate paid by all eligible self-employed individuals over the profit threshold.
How are NICs Paid by People in Traditional Employment (PAYE)
Anyone who is employed pays their taxes via the pay as you earn system (PAYE). This is where employers tax workers wages before they are issued, meaning that NICs and other taxes are paid before employees receive their wages. It is a simple and effective way of ensuring they pay the correct NICs amount and not overpay.
The Chancellor of the Exchequer, Rishi Sunak, reviewed the standard NIC rates in 2022 from 12% to 13.25%. He also raised the minimum threshold for payments to £12,570 from £9,880. According to the revised rates, earnings above £50,270 attract higher NICs at a rate of 3.25%.
The National Insurance regulations recognise the following categories of people and completely exempt them from mandatory payments.
- People under the age of 16
- Full-time students
- Apprentices aged under 25
- Most married women and widows born before April 1953
- People over the state pension age
How to Register for National Insurance as a Self-Employed Person
As a self-employed worker, you are required to register for National Insurance Contributions yourself. The process is simple and involves you to fill and complete a self-assessment tax return. It is a government form mandatory for every self-employed individual in the UK to submit annually. The information provided on the form helps the government calculate how much income tax and National Insurance you owe.
There are two NIC payment deadlines for the self-employed every year:
- By the 31st of January for the previous tax year
- By the following 31st of July for the current tax year
Self-employed citizens whose annual National Insurance Contributions would not exceed £500 can decide to pay once when filing their self-assessment tax return.
The form must contain details of every income tax and should be completed before the annual 31st January deadline. Failure to register for the self-assessment scheme implies your ineligibility to remit National Insurance Contributions or appropriate taxes and would attract a fine from HMRC.
Making Voluntary National Insurance Contributions
You are permitted to make voluntary National Insurance Contributions especially if there are gaps in your payment records. Having a good NIC record can qualify you for certain state benefits. Moreover, the steps to make these voluntary contributions are straightforward once you contact HMRC and set up a direct debit.
Is Class Two National Insurance Being Abolished?
The 2018 budget included the announcement to abolish the Class 2 National Insurance starting from April 2019. It was a genuine attempt by the government to simplify the tax system for the self-employed.
Despite their efforts, the Class 2 NICs remain to date because of certain concerns raised. Some people feared that the abolishment would result in higher National Insurance for the self-employed. The government refuted such claims but has yet to abolish the Class 2 National Insurance Contributions.
What is the National Insurance Fund in the UK?
This section lists the examples of state benefits funded by the UK government through collected National Insurance Contributions.
- The National Health Service (NHS) – the NHS is one of the important state benefits that is funded through National Insurance Contributions. It is a free healthcare service that is available to all UK residents at zero charge. The government claimed to increase the NIC rate in 2022 to provide extra funds to support its NHS scheme for the post-Covid era.
- Social Care – social care projects in the UK are also funded through the NICs. It covers the care provided to vulnerable residents such as the elderly and disabled. Social care includes home help, daycare and respite care, and was listed as one of the benefits in need of additional funds by the Chancellor in 2022.
- The State Pension – this refers to a regular payment made to people when they reach retirement age. The state pension is an important benefit of National Insurance Contributions. The amount an individual gets would depend on how much NICs they pay throughout their working life. There is a minimum amount of National Insurance payment that qualifies a person for the state pension. That explains why some people voluntarily pay NICs to fill the gaps in their payment records.
- Maternity and Paternity Leave – this is the leave that parents take when they have a new baby. A maternity/paternity leave includes options like paid leave, flexible working time and time-offs for antenatal appointments. The National Insurance funds this benefit package to give parents time to bond with their new baby without worrying about finances.
- Sick Pay – National Insurance also has provisions for those who are unable to work because of an illness or injury. A regular payment is made to such people to ease their recovery process.
- Unemployment Benefit – this state benefit is for employees who lose their jobs and are in search of a new one. National Insurance regularly pays them unemployment benefits.
- Universal Credit – this initiative was recently introduced by the UK government to support those families on a low income or unemployed. It is a single payment made to the poorest families to ease their financial burden.
Other Taxes for Self-Employed People
Learn about the other taxes that self-employed people pay in addition to National Insurance Contributions.
- Income Tax – refers to tax paid on income. The amount depends on your earnings for that tax year.
- Capital Gains Tax – this is tax paid on any profit made through the sale of an asset.
- Stamp Duty – refers to tax paid on the purchase of a property. The amount depends on the value of that property and surrounding circumstances.
- Council Tax – the tax amount paid to your local authority for services provided. The total tax depends on the value of your properties.
Possible Tax Exemptions for Self-Employed People
There are certain exemptions you might be eligible to claim while filing a self-assessment tax return. They include:
- Business Expenses – you can deduct business expenses like office costs, travel costs and stationery when calculating tax on your self-assessment return.
- Capital Allowances – you might be eligible to make claims for the cost of equipment or machinery you bought for your business.
- Enterprise Investment Scheme – you might also be eligible to claim the cost of investing in a new business.
- Research and Development Tax Credit – an exemption for the cost of research and development spent on your business.
You can claim any of the above tax deductions from your self-assessment once you prove they are necessary costs of running the business.
Final Thoughts
The Class 4 National Insurance is an important tax that self-employed people need to budget for if they’re earning profits over the £12,570 threshold. Contributions are made toward funding essential state benefits like the NHS, state pension, sick pay, and the care system. There is also the option to voluntarily pay NICs if you have gaps in your payment records. You can find out more about Class 4 National Insurance on the GOV UK website.
