Once you become self employed it is crucial to register with HM Revenue & Customs immediately so that you can pay the correct amount of tax and National Insurance Contributions. Failing to inform HMRC could incur penalties. The income tax that is due on self employed income is calculated when your self assessment tax return has been submitted to HMRC. Self employed people have to pay both Class 2 National Insurance Contributions and Class 4 contributions.
If profit is above £5,315 a year, Class 2 NICs are payable at £2.50 a week. If profit is below this level, you may apply for exemption. However, Class 2 NICs count towards some state benefits like the basic state pension or bereavement allowance, so consideration is advisable if claiming exemption. Class 2 National Insurance Contributions don’t count towards Jobseeker’s Allowance and additional State Pension, so alternative arrangements should be considered, like an insurance policy to protect loss of income, or a personal pension. Share fishermen who pay Class 2 NICs are an exception as their contributions do count towards Jobseeker’s Allowance.
Class 4 National Insurance Contributions are calculated as a percentage of your profits for the year. Yearly profits which are between £7,225 and £42,475 attract a nine percent deduction for Class 4 NICs. Any profit above that amount is payable at an extra two percent. Class 4 National Insurance Contributions are calculated along with income tax through your self assessment tax return. Class 4 contributions don’t count towards any state benefits.
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An experienced business and finance writer, sometimes moonlighting as a fiction writer and blogger.