As a working professional, there’s one thing you can certainly rely on: paying taxes. You’re probably familiar with paying Income Tax, but that’s not the only tax you’ll pay. You will also have to make National Insurance (NI) contributions.
If you’re an employee who gets paid under PAYE (Pay As You Earn), your National Insurance contributions will be deducted automatically from your paycheck. This is considered Class 1 National Insurance.
However, you’ll fall under Class 2 and Class 4 National Insurance if you're self-employed. HM Revenue & Customs (HMRC) will calculate your contributions differently, and how you pay will also be different.
In total, there are four National Insurance classes – which are discussed in our guide to National Insurance – but this article will focus primarily on Class 2. Let’s dive in.
Class 2 National Insurance is a tax contribution made by self-employed people that allows them to qualify for government benefits such as State Pension.
Two classes are relevant for self-employed workers. There’s Class 2 National Insurance and Class 4 National Insurance. The amount you pay in National Insurance contributions for both classes depends on how much you earn each tax year, with Class 2 having a lower threshold.
Class 2 National Insurance contributions are set at 3.15 per week for the 2022/23 tax year, which equates to £163.80 per year.
However, you only start paying Class 2 NI once your profit exceeds a threshold known as the Small Profits Threshold.
Not all self-employed workers have to pay Class 2 National Insurance. There is a short list of exempt people, including the following:
- You are under the age of 16
- Your profits do not exceed the Small Profits Threshold (see below)
- You have reached State Pension Age
- You are self-employed and working as an employee, and you have reached the maximum amount of National Insurance a person can pay.
- You rent out a few properties – this is considered an investment, not a trade
Most people who are in self-employment will pay Class 2 National Insurance contributions using a Self Assessment tax return. This is the same Self Assessment tax return that’s used to disclose your income and expenses, which is then used to determine how much Income Tax you must pay.
It should be noted that if this is your first time, you’ll have to inform HMRC that you will be filing a Self Assessment. To do so, simply register for Self Assessment using the government platforms before the deadline. Missing the Self Assessment deadline can result in late filing penalties, so it’s important to stay on top of it.
Having said that, not everyone pays their National Insurance contributions using the Self Assessment. Some lines of work will instead receive a payment request from HMRC, or they can make voluntary contributions. This applies if you satisfy any of the following criteria:
- You work abroad
- You live abroad and pay voluntary Class 2 National Insurance contributions
- You are a non-UK resident who is self-employed in the UK
- You run a real estate business that deals in property and/or land
- You are a minister of a religion, and you do not receive a stipend or salary
- You make investments in your name and do not receive a fee or commission
- You work in education as an examiner, moderator, or invigilator
Class 2 National Insurance applies to self-employed workers who make a profit of more than £6,725 per tax year. This figure is known as the Small Profits Threshold.
If your profits for the tax year do not exceed the Small Profits Threshold, you will not have to pay National Insurance.
However, you can still choose to pay voluntary contributions if you want to keep up your National Insurance record.
Class 2 National Insurance is often confused with paying Class 4 National Insurance since both classes apply to self-employed workers. However, there are differences between both.
The biggest difference between Class 2 and Class 4 National Insurance contributions is that you pay Class 2 NI if your profits exceed £6,725 per tax year, and you pay Class 4 NI if your profits exceed £11,909 per tax year.
This means that the difference lies in the threshold at which you start to pay National Insurance contributions. The Class 2 National Insurance threshold of £6,725 is called the ‘Small Profits Threshold’, whereas the Class 4 National Insurance threshold of £11,909 is called the ‘Lower Profits Limit’.
If your profits do not exceed these thresholds, you will not be required to make the respective National Insurance contributions.
Another difference is how much you pay in each class. Class 2 National Insurance contributions are set at £3.15 per week. On the other hand, Class 4 National Insurance contributions are set at 10.25% on profits between £11,909 and £50,270 per tax year. On all profits that are above £50,270, you will pay 3.25%.
|Class 2 (2022/23)||Class 4 (2022/23)|
|How much do you pay in National Insurance contributions?||If your profits exceed the Small Profits Threshold, you will have to pay £3.15 per week.||If your profits exceed the Lower Profits Limit, you will have to pay:10.25% on profits between £11,909 and £50,2703.25% on profits above £50,270.|
What is the threshold at which you start making National Insurance contributions?
|The Small Profits Threshold is set at £6,725.||The Lower Profits Limit is set at £11,909.|
|Is there a maximum threshold after which you do not have to pay National Insurance?||No, but suppose you are working as an employee and simultaneously in self-employment. If you are paying the full amount of Class 1 National Insurance, you might not need to pay Class 2.||No, but the amount you pay will change from 10.25% to 3.25% on all profits above £50,270.Suppose you are working as an employee and simultaneously in self-employment. If you are paying the full amount of Class 1 National Insurance, you might only be required to pay Class 4 National Insurance at a rate of 3.25% on profits above £11,909.|
|When is it paid?||All National Insurance payments must be made by 31 January following the previous tax year, regardless of whether you make payments on account or not. This is in line with the general Self Assessment deadlines.||All National Insurance payments must be made by 31 January following the previous tax year. This is in line with the general Self Assessment deadlines. |
If you make payments on account, they will be included in your instalments.
|How do you pay it?||It can be paid using a Self Assessment tax return.||It can be paid using a Self Assessment tax return.|
National Insurance pays for government services and benefits such as the NHS, State Pension, Maternity Leave, Statutory Sick Pay, Disability Allowances, Unemployment Benefits, and more.
Class 2 National Insurance is a requirement for self-employed workers who earn above £6,725 per year. For the current tax year, it is set at £3.15 per week and is usually paid through a Self Assessment tax return.
However, not all people have to pay Class 2 National Insurance. If you are in a special line of work, you have reached State Pension Age, or are under the age of 16, you will be exempt from paying Class 2 NI.