National Insurance Contributions
As a sole trader you must pay Class 2 NICs if your earnings exceed £5,965 (2015/2016) and you are under the State Retirement age (currently 60 for women and 65 for men). If you have to pay Class 2 NICs you are also likely to have to pay Class 4 NICs.
You should start paying Class 2 NICs as soon as your sole trader business starts. Failure to do so could result in a £100 penalty and a higher contribution rate. Class 2 NIC contributions are currently a flat rate of £2.80 (2015/16 ) per week payable by sole traders.
Class 4 NI contributions are like an additional personal tax payment and are paid via your Self-Assessment tax bill at the end of the year. Class 4 NIC will be due at a rate of 9% on profits in excess of £8,060 up to £42,385 with anything over that taxed at 2%.
If your sole trader earnings are low (less than £5,965 per year, you may be able to apply for the Small Earnings Exemption. If you are also an employee and are paying the maximum Class 1 contributions you may be able to defer your class 2 and 4 contributions.
Payment of NICs will affect the types of state benefits that you can claim.
Class 2 contributions will qualify you for most of the benefits that an employed person can claim. Employed persons pay Class 1 NICs. The two main exceptions are earnings related state pension and contribution-based Jobseekers allowance.
Class 2 National Insurance contributions are payable by 31st January and 31st July at a flat rate of £2.80 per month.
From April 2015, most self-employed people will be able to pay their Class 2 National Insurance contributions through self-assessment together with any income tax and Class 4 National Insurance contributions that are due.
As a result of the above changes, HMRC are no longer accepting new Direct Debit applications to pay for Class 2 contributions. HMRC will write and explain that instead of setting up a direct debit, they will send you a payment request in April 2015 to ask for the payment of any outstanding Class 2 National Insurance contributions you may owe up to 11th April 2015.
The planned changes from April 2015 mean that clients who wish to defer the payment of Class 2/4 National Insurance will no longer need to apply or re-apply for Class 2/4 deferment- no new applications will be processed going forward.
From 2015/16 onwards, the information provided on your self-assessment return, together with information HMRC already hold, will enable HMRC to determine the amount of any Class 2 or Class 4 National Insurance contributions you need to pay. A breakdown of all the amounts to be paid will be displayed on their self-assessment calculation.