Guide to National Insurance when self-employed

National Insurance is a tax to fund financial support schemes like the state pension and some benefit schemes.

Depending on the type of worker you are – whether you’re self-employed, an employer, or an employee – you’ll pay different categories and rates of National Insurance. How you pay it is different, too.

In this article, we’ll explain how to pay National Insurance when self-employed, along with everything you need to know.

Paying National Insurance when self-employed

Paying National Insurance when self-employed is your responsibility, and how much you pay depends on your earnings. You’ll use the self-assessment to report your personal income to HMRC, and to pay your National Insurance and tax, when self-employed.

In contrast, employees – which includes umbrella workers and sometimes contractors operating via their own limited company – have their National Insurance deducted from their gross pay by their employer, who makes the payments to HMRC.

National Insurance is split into four categories, called Classes. Self-employed workers operating as sole traders may be eligible for either Class 2 or Class 4:

Class 2 National Insurance

With profit between £6,725 and £11,908 a year, you’ll pay Class 2 National Insurance, which is set at £3.15 a week for 2022/23 tax year, or £163.80 for the year.

Class 4 National Insurance

If your profit is above £11,908, you’ll pay Class 4 National Insurance. This is calculated as a percentage of your profit; 9.73% on profit between £11,909 and £50,270, and just 2.73% on profit over £50,270.

What if I'm employed and self-employed?

If you meet the earnings criteria detailed above through self-employment, you’ll also be responsible for paying Class 2 and Class 4 National Insurance at the prevailing rates via the Self-Assessment.

You’ll also pay Class 1 National Insurance as an employee via PAYE, though you may be eligible to defer this.

Earnings thresholds

Self-employed workers are entitled to some earnings that are exempt from National Insurance – that is, any income below the Lower Earnings Limit (LEL):

Threshold	Income	Rate
Lower Earnings Limit	£123 a week (between £533 and £1048 a month)	0%
Primary Threshold	£242 a week (between £1,048 to £4,189 a month)	12%
Upper Earnings Limit	£967 a week (over £4189 a month)	2%

While Income Tax increases in line with your earnings, National Insurance decreases as you go over each threshold. So, you’ll pay less in National Insurance on your earnings as they increase. You won’t pay National Insurance on dividends, however, or on pension or investment income.

Benefit-in-Kind

Sometimes, employers can provide a Benefit-in-Kind (BiK) to their employees, whether in the form of a company car or private medical or dental care.

While some benefits are tax-free, most are taxed. However, non-cash benefits – such as a business phone or company car – aren’t subject to Class 1 National Insurance (where cash benefits, or direct cash benefits, are).

State Pension entitlement

To qualify for the state pension, you must have paid National Insurance for 35 years or more, because the state pension is partly funded by the tax.

Most people will work long enough to be eligible, and while there’s room for manoeuvre, you can also make voluntary contributions at any time, at the Class 2 rate, to prevent or backfill gaps in your National Insurance record. This means your access to the state pension isn’t affected by any time out of work.

Earnings periods

National Insurance is calculated over an earnings period. These are generally based on the frequency of your pay, which is why the rates are calculated on both a weekly and monthly basis.

So, paying National Insurance when self-employed is relatively straightforward. There are two rates, and which one you pay depends on how much you earn through your work.

To find out how Caroola can help with your tax and accounting needs, please request a callback and one of our friendly experts will be in touch.