National Insurance

Click on the links below to read more:

Overview

A self-employed person over the age of 16 must, unless specifically exempted, pay both class 2 and class 4 contributions.

Class 2 contributions are payable at a flat weekly rate and entitle the contributor to all benefits except jobseekers allowance and the earnings related supplement to the state retirement pension.

Class 4 contributions are payable at a fixed percentage on profits chargeable to income. They carry no entitlement to benefits of any kind.

Class 2 contributions

Upon becoming self employed you must notify the revenue within three months of the end of the month in which you start to trade (using form CWF1 which can be obtained as part of the booklet PSE1), that you are liable to pay class 2 contributions, even if you are going to apply for deferment because you pay class 1 contributions as an employee.

There is currently a £100 penalty for failure to do so.

The weekly rate is currently £2.30 and payment can be made either monthly by direct debit or quarterly in arrears.

The following people are not liable to pay class 2 contributions

• Men and women over state pension age (men 65, women 60)
• Married women who chose on or before 11 May 1977 to pay reduced rate class 1 contributions or to pay no class 2 contributions (provided the election has not been automatically revoked by divorce or widowhood)
• Someone with small earnings who obtains a certificate of exception (see below)
• Someone who is not 'ordinarily' self employed (see below)
• Someone who for a full week is
1. Incapable of work
2. In prison
3. Receiving incapacity benefit or maternity allowance

• Someone who for any day in a particular week receives invalid care allowance

In the case the last two the exemption applies only to the particular week concerned.

Small Earnings

There is no need to pay class 2 contributions if earnings are below £4825 (from 01/04/08) per annum but since the amount payable is only £2.30 per week then unless you have earnings on which class 1 contributions are paid, it is sensible to pay class 2 contributions to maintain social security benefits, particularly the state retirement pension.

In order to apply for a certificate of exception for a tax year you need to show that

• • Net earnings for that tax year are expected to below a specified limit (£4825 from 01/04/08), or
• Net earnings for a previous tax year were less than the limit specified for that tax year (£4635 in 2007/8) and that circumstances have not materially altered.

Net Earnings in this context are earnings are earnings shown in the profit and loss account after deduction of all relevant business expenses (But do not deduct drawings, national insurance or tax paid) as opposed to taxable earnings.

Where an accounting period overlaps 5th April, earnings are strictly apportioned on a time basis between tax years but in considering the second criteria above the Revenue will normally take the accounts year ended in the previous tax year.

There are strict time limits for obtaining refunds

Application must be made by 31st January following the end of the tax year in question.

Persons not 'ordinarily' self employed

There is no statutory definition of 'not ordinarily self employed' but the example quoted by the revenue in leaflet CA02 (Now replaced by form CF10) is of a person employed in a regular job whose earnings from spare time self employment are not expected to exceed £1300 in a tax year.

More than one self-employment

Those who are self employed only have to pay one weekly class 2 contribution no matter how many self employed occupations they may have. In deciding whether there is an entitlement to a certificate of exception on the ground of small earnings, all sources of self-employed earnings are added together.

Class 4 contributions

Class 4 contributions are payable at a percentage rate on profits chargeable to income tax which fall between specified upper and lower limits.

For 2008/9 the contribution rate is 8% on profits between "5435 and "40040 and 1% on profits above £40040.

Generally profits are computed in the same way for class 4 contributions as for income tax but certain special rules apply for example, trading losses, which can be offset against non-trading income and capital gains for tax purposes are only offset against trading income for national insurance, and thus may be carried forward against future profits for calculating class 4 contributions.

Class 4 contributions are collected along with income tax under self-assessment, so that payments on account that are made on 31st January and 31st July include class 4 contributions based on the previous years figures, with any balancing adjustment shown on the tax return and payable or repayable on the following 31st January.

There is a provision on the tax return for the taxpayer to indicate that he is exempt from class 4 contributions (see below) in which case no contributions are shown.

If any class 4 contributions are ultimately payable, they are collected by the Revenue directly rather than through the self assessment system.

Exempt persons

The following are exempt from paying class 4 contributions

• Men and women over state pension age at the beginning of the tax year
• Individuals who are not resident in the UK for income tax purposes
• Trustees and Executors who are chargeable to income tax on income they receive on behalf of other people.
• 'Sleeping partners' who supply capital and take a share of the profits but take no active part in running the business
• Someone who is under 16 on 6 th April in a particular year and holds a certificate of exception for that year. (Application for an exception certificate should be made on form CA 2835U. The application only needs to be made once as the certificate granted will cover all the relevant tax years)
• Someone who is not 'ordinarily self employed' (see above)

Partnerships

Each active partner is liable to both class 2 and class 4 contributions (unless the wife is exempt from class 2 contributions (see above). The class 4 profit limits apply to each partners share.

A partner's class 4 contributions are entered on the partner's personal return unless a deferment has been applied for. Where a partner carries on other trades, the profits of all businesses are added together when calculating the overall class 4 liability.

Edmund house, 27 St. James's Road, Dudley, West Midlands, DY1 3JD