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When should I be paying National Insurance?

The next blog in our tax series looks into National Insurance and what it means for small business owners and side-hustlers. Do you know when you need to pay it?

3 min read

What is National Insurance? 

For the average employee, National Insurance is simply another deduction from your payslip. Some of us may not even know what it is, why we pay it or what it means if you’re running a small business alongside another job. 

Simply put, National Insurance is a form of contribution in order to have access to benefits provided by the state, for example, your state pension. As a self-employed person, you will need to pay National Insurance at a certain amount, based on your yearly profits, for a set number of years to qualify for the state pension. To find out when you hit your state pension age, check here. 

When should I start paying? 

HMRC clearly states you should be paying National Insurance if you’re aged 16 or over and you are either: 

  • An employee earning more than £184 a week 

  • Self-employed making a profit of £6,515 or more a year.

If you work for someone else, your employer should be working this all out for you and deducting the right amounts from your pay automatically. this is what you’ll see on your payslip usually abbreviated to ‘NI’ under ‘Deductions’, although this can vary between companies.

On the other hand, if you’re self-employed as a small business owner, side-hustler, sole trader etc. then the amount of National Insurance you have to pay depends on your profits for the year.

How do I know what to pay?

The different classes of National Insurance vary depending on your employment situation and are ways the government uses to figure out how much you owe, much like tax codes.

If you are solely self-employed then you do not need to worry about Class 1 National Insurance Contributions (hereon referred to as NIC). In terms of what the Classes mean for side-hustlers, if you are an employee and also consider yourself self-employed your employer should be deducting Class 1 NIC from your wages as explained above. Then, depending on the profits you make on your side-hustle demonstrated in the table below you may have to pay Class 2 and 4 NIC for your side-hustle/self-employed work, this table is correct for the tax year 2021/22.

Profits vs Classes breakdown

It is worth noting that the profits of your business are not income from your business alone, but instead are the income you have generated from your business minus your business expenses. 

The rates between classes vary and, similarly to the profit thresholds in the table above are subject to change year on year. It is always worth checking on the HMRC website, gov.uk for the most up to date figures. 

In the tax year 2021/22, If you earn between £6,515 - £9,568 you should be paying £3.05 a week - this doesn’t change if you’re earning say £7,001 or if your profits are £9,400 it is the same amount of £3.05 a week. However, Class 4 contributions are specific to your profits. They are 9% on your profits between £9,569 - £50,270 and 2% on any profits above £50,270. 

The good news is that this calculation is done as part of your tax self-assessment at the beginning of the year so mandatory payments are calculated for you in the same place at the same time. That way you only need to worry about filling out the forms when you should be filling out your tax forms anyway, for context the deadline for online tax returns for 2020/21 tax year is 31 January 2022. 

Voluntary payments to National Insurance? 

If you do not earn enough to pay Class 2 contributions you may want to consider paying voluntary contributions. There are a number of reasons why this might be good to consider, for instance, if you have gaps in making contributions or you are nearing your State Pension age and do not have enough years of contributions to qualify for it. Voluntary contributions are called Class 3, they count mainly towards the same benefits as Class 2 but with some slight differences clearly laid out in this table. 

When do I stop paying National Insurance?

If you’re self-employed you stop paying:

  • Class 2 National Insurance when you reach State Pension age

  • Class 4 National Insurance from 6 April (the start of the tax year) after you reach State Pension age

As an example, Ciara was born 10 October 1967 therefore her State Pension age would be 67. Having been self-employed for most of her life and paid NICs for more than 35 qualifying years, in order to get the full State Pension, once she turns 67 years old on 10 October 2034, she would immediately stop paying Class 2 NIC, but would only finish paying Class 4 NIC on 6 April 2035. 

As a reminder, your National Insurance is paid alongside your tax self-assessment at the beginning of each year. Although it may seem like another burden National Insurance is important to consider if you want to start thinking about your future and pension.

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