National Insurance Contributions for the Self-Employed
Last updated on September 25th, 2019 at 4:15 am
National Insurance Contributions (NICs) are covered in many CII exams including CF1, R01, R03 and AF1. Here, we look at the NIC liabilities, including a calculation, for a sole trader.
THIS ARTICLE IS RELEVANT TO EXAMINABLE TAX YEAR 2018/19.
Case Study
Henry is setting up in business as a cabinet maker. He will be a sole trader and wishes to understand what he must do in terms of registering as self-employed and paying NICs.
Things to Consider
Henry will need to register with HMRC for self-assessment. He will need to keep accurate records of his sales and expenses and file a tax return each year.
As a sole trader, Henry will be liable to two classes of National Insurance. Firstly, Class 2, which is a flat weekly payment of £2.95, where his annual profits exceed £6,205. This will ‘buy’ Henry’s right to certain State benefits, in particular, State pension. He will also have to pay Class 4 contributions, which are paid on profits of more than £8,424 per year: 9% of profits between £8,424 and £46,350 and an extra 2% charged on profits above £46,350 (with no upper limit).
NICs are covered in various CII exams as follows:
CF1 Learning Outcome 7: Understand the UK tax & social security systems & how they affect personal financial circumstances
R01 Learning Outcome 3: Understand the legal concepts and considerations relevant to financial advice
R03 Learning Outcome 4: Apply the knowledge of personal taxation to the provision of investment advice
AF1 Learning Outcome 2: Understand and analyse the main taxes on income and capital
Question
Henry is up and running as a self-employed cabinet maker. He has taxable earnings of £56,000 in this tax year. What is the total amount of Class 2 and Class 4 NICs that he must pay?
- £3,315.24
- £3,463.24
- £3,535.24
- £3,759.74
Answer
The answer is D.
Detailed explanation
Annual profits are over £6,205 so Henry must pay the flat rate Class 2 of £2.95 per week: £2.95 x 52 = £153.40
As his profits are over £8,424, he must also pay Class 4 contributions of 9% up to the upper limit of £46,350: £46,350 – £8,424 = £37,926 x 9% = £3,413.34
2% is payable on profits over the upper limit: £56,000 – £46,350 = £9,650 x 2% = £193.00
Total NICs in this tax year are:
Class 2: £153.40
Class 4: £3,413.34 + £193.00
Total: £3,759.74
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