The first thing for sole traders to note is that the rates of National Insurance Contributions (NICs) for the self employed are different to those of PAYE employees. This is partly in recognition of the challenges faced by the self employed in terms of cash flow, as contributions are paid in a lump sum twice a year rather than through the PAYE system and spread over the year.
All employment taxes including the thresholds which affect NICs are reviewed each year in the Treasury’s annual budget process and take effect each 6 April in line with the new tax year.
As of 6 April 2019 the government plans to abolish Class 2 NICs and reform Class 4 NICs to include a new threshold (the Small Profits Limit). It is worth noting that this move has already been delayed one year. More details are expected to be announced in this year’s Autumn Budget.
There are two main classes of NICs which apply to sole trader profits:
- Class 2 NICs – for the 2018/19 tax year you pay Class 2 contributions of £2.95 a week on profits over £6,205. This totals £153.40 for the year.
- Class 4 NICs – you pay 9% on profits between £8,424 and £46,350. This reduces to 2% for profits over £46,350.
If you earn below the Class 2 threshold you may choose to make voluntary contributions. This will allow you to avoid gaps in your payment history, as these gaps may mean you won’t have enough years of contributions to get your full state pension. You can usually pay voluntary contributions for the past 6 years.
Currently, thirty-five years’ worth of contributions are required to get a full flat rate state pension of £164.35 a week. You can check your national insurance record online through your Government Gateway account to see your contributions up to the start of the current tax year (6 April 2018). Visit https://www.gov.uk/check-national-insurance-record