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National Insurance Contributions for the Self-Employed

National Insurance Contributions for the Self-Employed

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?

  1. £3,315.24
  2. £3,463.24
  3. £3,535.24
  4. £3,759.74
Taking a look at the NIC liabilities, including an example calculation, for a sole trader - useful for #CII #AF1, CF1, R01 and R03 exam revision Click To Tweet

 

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 

Grab the resources you need!

If you’re studying for your CII R03 exam, and you’re wanting to feel confident on exam day, grab our free taster to try out one of Brand Financial Training’s resources for yourself.  Click the link to download the R03 mock paper taster now!

Click here to download our free taster mock paper for CII R03

Alternatively, you can try the taster for any of AF1, CF1 or R01 if you’re studying for one of those exams.