Class 4 National Insurance is a tax that self-employed people in the UK have to pay. It is used to fund state benefits, such as the NHS and pensions. It is different to other classes of National Insurance that are paid by employers and by people in “traditional employment”.
Paying National Insurance as a self-employed person can be difficult because, unlike employed people, you have to file your tax returns yourself through Self Assessment.
To help make the process easier, this article will explain everything you need to know about Class 4 Insurance, how to pay it and other potential taxes you may be liable for.
What are National Insurance Contributions?
National Insurance Contributions (NICs) are taxes that are used to fund certain state benefits in the UK. These include the NHS, pensions and unemployment benefits. In order to be eligible for these benefits, you must have paid a certain amount of NICs over your lifetime.
National Insurance Contributions must be paid by everyone who is employed and/or self-employed in the UK. The amount you pay depends on your income and employment status but evading or avoiding paying can result in criminal prosecution.
Classifying Yourself for National Insurance
In order to calculate the right amount of National Insurance, you need to classify yourself correctly. There are three main categories:
- Employed – If you are employed, you will pay National Insurance through your PAYE (Pay As You Earn) tax code.
- Self-Employed – If you are self-employed, you will need to register for National Insurance and pay it through your Self Assessment tax return.
- Voluntary – If you are not working, you may still be able to make voluntary National Insurance payments. This can help to ensure that you are entitled to certain benefits, such as the state pension.
What is Class Four National Insurance?
Class Four National Insurance is a tax that is paid by self-employed people in the UK. Like all National Insurance Contributions, Class 4 NICs are used to fund state benefits, such as the NHS and pensions. The amount of Class Four NI you pay depends on your annual profits which are declared through your Self Assessment tax return.
Self-employed people have to pay NICs in this way because there is no way for the government to deduct the money directly from their earnings, as is the case with employed people. It is important that you keep up to date with the latest National Insurance news to ensure that you are not overpaying.
Who has to pay Class Four National Insurance?
All self-employed people in the UK who are making a profit of between £9,881 and £50,270. For these profits, the Class 4 National Insurance rate is 10.25%. For any profits above £50,270, you will pay Class 4 NICs at a rate of 3.25%.
Examples of Class 4 NICs
1. David earns £9,500 profit per year from his job as a freelance photographer. These profits are below the £9,881 personal allowance so he will not have to pay any Class 4 NICs. However, David will still be eligible to pay Class 2 NICs (explained in detail below.)
2. Sarah is a self-employed web developer. She has annual profits of £30,000. For the first £9,881 of these profits, Sarah will not have to pay any Class 4 NICs (though she will be eligible for Class 2 NICs. For her profits above £9,881, she will be eligible to pay Class 4 NICs at a rate of 10.25%.
£30,000 – £9,881 = £20,119
10.25% of £20,119 = £2,062.19 Class 4 NICs.
3. Michael is a self-employed accountant. In the tax year, he has profits of £60,000. Again, the first £9,881 will not qualify for Class 4 NICs. The profits between £9,881 and £50,270 will require NICs at a rate of 10.25%. The profits above £50,270 will require NICs at a rate of 3.25%.
£50,270 – £9,881 = £40,389
10.25% of £40,389 = £4,139.87
£60,000 – £50,270 = £9,370
3.25% of £9,370 = £316.22
£4,139.87 + £316.22 = £4,456.09 Class 4 NICs
Class 2 National Insurance
Class Two National Insurance is another tax that is paid by self-employed people in the UK and which is also used to fund state benefits, such as the NHS and pensions. Every self-employed person who makes profits of over £6,725 a year must pay Class 2 National Insurance at a flat rate of £3.15 a week or £163.80.
Therefore, if we look again at the above three examples, David’s total NICs would be £163,80, Sarah’s would be £2,225.99 and Michael’s would be £4,619.89.
How are NICs Paid by People in Traditional Employment (PAYE)
If you are employed, your National Insurance Contributions will be deducted from your wages before you receive them as part of PAYE (Pay As You Earn.) For most people, this is the easiest and most efficient way to make sure that you are paying the right amount of NICs.
In 2022, the Chancellor of the Exchequer, Rishi Sunak, announced a rise in the standard rate of National Insurance from 12% to 13.25%. However, he also raised the minimum threshold for payment from £9,880 to £12,570. The higher rate of NICs must be paid on earnings above £50,270 a year at a rate of 3.25%.
However, there are some people who are exempt from National Insurance altogether. These include:
• People under the age of 16
• Some full-time students
• Apprentices aged under 25
• Most married women and widows born before April 1953
• Some people over the state pension age
How to Register for National Insurance as a Self-Employed Person
If you are self-employed, you will need to register for National Insurance Contributions yourself. You can do this by completing a Self Assessment tax return. This is a government form that must be completed by all self-employed people in the UK every year, and it is used to calculate how much income tax and National Insurance you owe.
Self-employed people usually have to pay their National Insurance Contributions twice a year:
• By the 31st of January for the previous tax year
• By the following 31st of July for the current tax year
However, if you expect to owe less than £500 in National Insurance contributions for the year, you can choose to pay it all at once when you file your Self Assessment form.
You will also need to file your income taxes on your Self Assessment form. This must be done before the 31st of January every year. If you do not register for Self Assessment, you will not be able to pay your National Insurance Contributions or taxes and you may be fined by HMRC. If you have any problems with filling out the form or you are going to submit it late, make sure you get in touch with HMRC immediately so that you can avoid any penalties.
Making Voluntary National Insurance Contributions
If you have gaps in your National Insurance record, you may want to make voluntary contributions. This is not required, but it can help you to qualify for certain state benefits, such as the state pension. You can make voluntary contributions by contacting HMRC and setting up a direct debit.
Is Class Two National Insurance Being Abolished?
In the Budget 2018, it was announced that Class Two National Insurance would be abolished from April 2019. This is because the government wanted to simplify the tax system for self-employed people.
However, some people were worried that this would mean that self-employed people would have to pay more for National Insurance in the long run. The government said that this would not be the case but at the time of writing (April 2022), Class 2 National Insurance has yet to be abolished anyway.
What does National Insurance Fund in the UK?
There are many important benefits that NICs fund and which help millions of people in the UK. These include:
- The National Health Service – One of the most important benefits that National Insurance funds is the NHS. This is a free healthcare service that is available to all UK residents and is totally free at the point of use. It was to provide extra funding for the NHS post-Covid that the government claimed to have increased the National Insurance rate in 2022.
- Social Care – National Insurance also helps to fund social care in the UK. This is the care that is provided to vulnerable people, such as the elderly or disabled. It can include things like home help, daycare or respite care. This was another area identified by the Chancellor in 2022 as needing additional funding with people living longer than ever before.
- The State Pension – Another important benefit that National Insurance contributes to is the state pension. This is a regular payment that is made to people when they reach retirement age. The amount you get depends on how much National Insurance you have paid over your working life. You need to have paid a certain amount of National Insurance over your lifetime to qualify for the state pension so if you have any gaps in your NIC record, you may want to consider making voluntary payments.
- Maternity and Paternity Leave – This is the leave that parents can take when they have a baby. It includes things like paid leave, flexible working and time off for antenatal appointments. National Insurance helps to fund this so that parents can take the time they need to bond with their new baby without worrying about money.
- Sick Pay – If you are unable to work because you are sick, National Insurance will help to fund your sick pay. This is a regular payment that is made to people who are unable to work due to illness or injury.
- Unemployment Benefit – If you lose your job, National Insurance will help to fund your unemployment benefit. This is a regular payment that is made to people who are unemployed and looking for work.
- Universal Credit – Universal Credit is a new benefit that was recently introduced in the UK to help the poorest families. It is a single payment that is made to people who are on a low income or out of work. National Insurance helps to fund this so that families can get the support they need.
Other Taxes for Self-Employed People
As well as National Insurance, there are other taxes that self-employed people have to pay. These include:
- Income Tax – This is a tax that is paid on your income. The amount you pay depends on how much you earn and your personal circumstances.
- Capital Gains Tax – This is a tax that is paid on any profit you make when you sell an asset, such as property or shares.
- Stamp Duty – This is a tax that is paid on the purchase of a property. The amount you pay depends on the value of the property and your personal circumstances.
- Council Tax – This is a tax that is paid to your local authority for the services they provide. The amount you pay depends on the value of your property and your personal circumstances.
Possible Tax Exemptions for Self-Employed People
When calculating the taxes you owe on your Self Assessment, you may be able to claim certain exemptions. These include:
- Business Expenses – You can deduct any business expenses from your Self Assessment. This includes things like office costs, travel costs and stationery.
- Capital Allowances – You may be able to claim for the cost of equipment or machinery that you have bought for your business.
- Enterprise Investment Scheme – You may also be able to claim the cost of investing in a new business.
- Research and Development Tax Credit – This is an exemption for the cost of research and development that you have undertaken for your business.
All of these are seen as necessary costs of running a business and as such can be deducted from your Self Assessment. This helps to reduce the amount of tax you owe.
As you can see, the answer to the question of what Class 4 National Insurance is used for is that it helps to pay for a variety of things such as the NHS, state pension, maternity and paternity leave, sick pay and unemployment benefit. It is a tax that is paid by self-employed people through Self Assessment and which is calculated based on their profits.
To find out more about Class 4 National Insurance, visit the GOV.UK website.