A guide to National Insurance for the self-employed

National Insurance has become a firmly established part of Britain’s taxation system since its inception in 1911. Today it forms the basis for the social benefit payments that make up the welfare state, from sick pay and parental leave pay to state pensions and the National Health Service.

Until 1975, all contributions to National Insurance were made at a flat rate but since then, the process of calculating contributions has become more complex. What you pay will depend on how much you earn and what kind of employment you undertake.

As with many aspects of the UK’s tax code, National Insurance is a more complex business for self-employed people than it is for employees who pay their taxes through the PAYE system. So, here is our guide to understanding how National Insurance works for the self-employed, how much you will be required to pay and how and when you go about making your contributions.

Who has to pay National Insurance contributions?

Given that you will be required to pay National Insurance contributions (NICs) on your earnings from the age of 16 until you retire, most people will be very familiar with the concept and how their NI contributions are deducted from their pay slip each month.

Most employees on a pay-as-you-earn (PAYE) tax model will pay class 1 NICs and these will be deducted, along with your income tax, before your salary reaches your bank account.

Exemptions

Most workers between the ages of 16 and their retirement must pay National Insurance, unless they earn below the primary threshold (which is £242 a week for the 2023/24 tax year).

Also, married women and widows who opted into the Reduced Rate Scheme before April 1977 are eligible for an exemption from paying class 2 NICs (though they must still pay class 4 contributions).

Different classes of National Insurance Contributions

There are, broadly speaking, four classes of NICs:

• Class 1 contributions from employees working for a company on a PAYE basis
• Classes 2 and 4 concern self-employed people
• Class 3 concerns voluntary contributions (we’ll cover these later on)

Class 1

As a self-employed person, you won’t need to worry too much about class 1 contributions, unless of course you split your time between self-employed projects and a PAYE job as freelancers often do. In this case, your PAYE employer will deduct your class 1 contributions alongside your income tax directly from your pay before it reaches you.

Between 6 April 2024 and 5 April 2025, most people will pay class 1 contributions of:

• 0% on earnings up to £242 a week
• 8% on weekly earnings between £242 and £967
• 2% on weekly earnings above £967

If you are employed by a company on a PAYE basis, your employer is required to make National Insurance contributions in addition to those that you make. These are known as class 1a and 1b, and from 6 April 2024 to 5th April 2025, both are charged at a rate of 13.8%.

Class 2

Class 2 contributions cover the self-employed and can get a little complicated.

You won't have to pay Class 2 National Insurance contributions if your annual net profits are £6,725 or more for the financial year 2024/25, but they will be considered as paid to protect your record for state benefits like the State Pension.

Should your net profits exceed £12,570 for the financial year 2024/25, you'll need to pay Class 4 National Insurance contributions, which are based on your income. We break this down below.

If you're earning less than £6,725, you can make voluntary contributions so you're entitled to state benefits. The Class 2 rate for tax year 2024/25 is £3.45 a week.

Class 4

Class 4 contributions are also payable by self-employed people and for the 2023/24 tax year are calculated at:

• 0% on net annual profit up to £12,570
• 6% on profit between £12,570 and £50,270
• 2% on profit over £50,270

How to pay

For employees of companies using the PAYE method, all your income tax and NICs are calculated according to your tax code and deducted automatically from your salary before it is paid to you.

For self-employed people, the picture is a little more complex. As with income tax, your NICs are calculated based on your self-assessment return filed with HMRC each year.

Read our guide to completing your Self Assessment tax return

When you enter the details of your self-employed earnings and allowable expenses for the year into your tax return, HMRC will calculate your net profit and, from that, your National Insurance contributions in both classes 2 and 4.

The deadline for submitting your self-assessment tax return and paying the tax and National Insurance you owe is 31 January.

Finally, there are some circumstances in which you may be required to pay class 2 NICs but you will not submit a self-assessment tax return. For instance, if you are:

• An examiner, moderator, invigilator or person who set exam questions
• Running a business involving land or property
• A minister of any recognised religion and you do not receive a salary
• Living abroad and paying voluntary Class 2 contributions
• Making investments, but not as a business
• A non-UK resident who is registered as self-employed in the UK

In these cases, HMRC will contact you with a payment request by the end of October each year.

What if I miss a year of contributions?

Whether you work for an employer using PAYE or you’re self-employed, there may be periods in your working life when you are not earning and therefore not paying NICs. This can lead to gaps in your contributions record. These gaps can affect:

• When you are able to draw a state pension
• Whether you will be entitled to a full pension
• Your ability to claim other working-age benefits

This problem is compounded for some self-employed people because the nature of freelance work means that some years you are likely to earn less than others, making your record of contributions patchy and potentially incomplete.

This is where class 3 contributions kick in to fill gaps in your record and allow you to still access the complete range of benefits, including a full state pension.

Class 3 NICs are known as Voluntary Contributions and are a way for self-employed people who make less than the £6,725 profit threshold to voluntarily contribute and avoid gaps in their record.

Changes to National Insurance

As with many aspects of the UK’s taxation system, National Insurance is a constantly evolving set of calculations meaning that, year to year, the amount you will be required to contribute can change.

An example of the evolutionary nature of National Insurance came back in 2016, when the government proposed abolishing the flat-rate class 2 NICs for self-employed people and replacing it with one single and restructured class 4 NIC, allowing access for contributory benefits such as job-seekers allowance and bereavement benefit.

This proposal was abandoned in 2018 and class 2 and 4 contributions remained as they were. However, calls for reforms to self-employed NICs continue and further changes cannot be ruled out in the future.

In response to both the Covid-19 pandemic and the longer-term crisis in social care funding, class 1 and 4 NICs increased by 1.25 percentage points in April 2022 to directly fund the NHS and social care provision.

But from 6 April 2023, NIC rates returned to 2021/022 levels, with a separate Health and Social Care Levy becoming a new, separate tax charged at 1.25%.

In the November 2023 Autumn Statement, former Chancellor Jeremy Hunt announced eye-catching changes to National Insurance Contributions for both the self-employed and employees.

We cover both the Spring budget and Autumn statement each year, so you find out what they mean for small businesses.

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• How to complete your Self Assessment tax return
• Tax guide for self-employed professionals
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