In the UK, Class 4 NIC (National Insurance Contributions) is a tax that the self-employed are required to pay for profits over £12,570, and it’s used by the government to fund state benefits. But what are the rates, and how is it calculated?
In this article, Real Business will explore the calculation rules behind class 4 National Insurance, including how the self-assessment tax return is filed, and more.
Table of Contents
National Insurance Contributions – What Are They?
National insurance classes range from 1 – 4, and each one is a tax levied and adjusted for different working groups for fairness purposes. For a quick summary:
| Class | Who Pays |
|---|---|
| Class 1 | Employees earning above the threshold |
| Class 1A/1B | Employers |
| Class 2 | Self-employed above small profits threshold |
| Class 3 | Voluntary contributions |
| Class 4 | Self-employed above lower profits limit |
The state benefits funded involve:
- State Pension
- New State Pension
- Contribution-Based Jobseeker’s Allowance (JSA)
- Contribution-Based Employment and Support Allowance (ESA)
- Maternity Allowance
- Bereavement Support Payment
- Some aspects of the NHS
By paying into the system, you gain access to state pension when you reach state pension age, and contribution-based allowances when you meet other eligibility criteria. Upon receiving your national insurance number at age 16, you must pay national insurance contributions when you work and are sorted into one of four national insurance classes.
What Is National Insurance Contributions Class 4?
National Insurance class 4 is reserved for those who are in self-employment, and earning above the lower profits limit, which is set at £12,570 annually for the tax year of 2024 – 2025. From there, a fixed tax percentage (currently 10.25% for 2024-25) is applied to profits between the lower profits limit (£12,570) and the upper profits limit (£50,270).
It’s not paid like a Class 1 national insurance, which is a PAYE (Pay As You Earn) tax code that automatically deducts from your employment income. This is because it’s the job of the employer, who holds and releases the funds, to deduct.
So if you have no employer, which self-employed taxpayers don’t, then you are responsible for the deduction yourself. It’s done so via self-assessment tax return forms.
The process is as follows:
- Register and receive form – You have to register with HMRC. There, you can do an online self-assessment or request a paper form. We highly recommend going online, as it’s faster and more convenient for all parties involved.
- Gather information – The necessary information consists of annual profit income from business accounts, records of expenses and income, and any other details relevant to cash flow and taxes, such as pension contributions and student loans.
- Calculate Class 4 NIC – Use the tax calculation tools built into the online software. For paper form, you will have to do this yourself.
- Submit the return – The 31st of October is the deadline for the paper submission, and the 31st of January is the deadline for the online tax return.
What Is Class 2 National Insurance, And How Does It Differ From Class 4 NIC?
Class 2 national insurance and class 4 NIC are similar in that they are both for workers with self-employment status, but differ in criteria:
| Aspect | Class 2 NIC | Class 4 NIC |
|---|---|---|
| Who pays | Self-employed workers | Self-employed workers |
| Threshold | Payable when profits exceed the small profits threshold (£6,725 for the 2024/2025 tax year) | Payable if profits exceed the lower profits limit (£12,570 for the 2024/2025 tax year) |
| Rate | Fixed weekly amount (£3.45 per week for the 2024/2025 tax year) | 10.25% of profits between lower and upper profits limit (£50,270) |
| Purpose | Builds entitlement to state benefits | General contribution to national insurance fund |
| How Paid | Self-assessment tax return | Self-assessment tax return |
Making Voluntary National Insurance Contributions
You are permitted to make voluntary National Insurance Contributions especially if there are gaps in your payment records to keep your NIC record strong, entitling you to state benefits. The steps to make these voluntary contributions are straightforward once you contact HMRC and set up a direct debit.
Is Class Two National Insurance Being Abolished?
The 2018 budget included the announcement to abolish the Class 2 National Insurance starting from April 2019. It was a genuine attempt by the government to simplify the tax system for the self-employed.
Despite their efforts, the Class 2 NICs remain to date because of certain concerns raised. Some people feared that the abolishment would result in higher National Insurance for the self-employed, which the government has denied.
What Are National Insurance Contributions Used For?
This section lists the examples of state benefits funded by the UK government through collected National Insurance Contributions.
- The National Health Service (NHS) – The NHS is one of the important state benefits that is funded through National Insurance Contributions. It is a free healthcare service that is available to all UK residents at zero charge. The government claimed to increase the NIC rate in 2022 to provide extra funds to support its NHS scheme for the post-Covid era.
- Social Care – Social care projects in the UK are also funded through the NICs. It covers the care provided to vulnerable residents such as the elderly and disabled. Social care includes home help, daycare and respite care, and was listed as one of the benefits in need of additional funds by the Chancellor in 2022.
- The State Pension – This refers to a regular payment made to people when they reach retirement age. The state pension is an important benefit of National Insurance Contributions. The amount an individual gets would depend on how much NICs they pay throughout their working life. There is a minimum amount of National Insurance payment that qualifies a person for the state pension. That explains why some people voluntarily pay NICs to fill the gaps in their payment records.
- Maternity and Paternity Leave – This is the leave that parents take when they have a new baby. A maternity/paternity leave includes options like paid leave, flexible working time and time-off for antenatal appointments. The National Insurance funds this benefit package to give parents time to bond with their new baby without worrying about finances.
- Sick Pay – National Insurance also has provisions for those who are unable to work because of an illness or injury. A regular payment is made to such people to ease their recovery process.
- Unemployment Benefit – This state benefit is for employees who lose their jobs and are in search of a new one. National Insurance regularly pays them unemployment benefits.
- Universal Credit – This initiative was recently introduced by the UK government to support those families on a low income or unemployed. It is a single payment made to the poorest families to ease their financial burden.
Other Taxes For Self-Employed People
Learn about the other taxes that self-employed people pay in addition to National Insurance Contributions.
- Income Tax – refers to tax paid on income. The amount depends on your earnings for that tax year.
- Capital Gains Tax – this is tax paid on any profit made through the sale of an asset.
- Stamp Duty – refers to tax paid on the purchase of a property. The amount depends on the value of that property and surrounding circumstances.
- Council Tax – the tax amount paid to your local authority for services provided. The total tax depends on the value of your properties.
Possible Exemptions For The Self-Employed Taxpayers
There are certain exemptions you might be eligible to claim while filing a self-assessment tax return. They include:
- Business Expenses – you can deduct business expenses like office costs, travel costs and stationery when calculating tax on your self-assessment return.
- Capital Allowances – you might be eligible to make claims for the cost of equipment or machinery you bought for your business.
- Enterprise Investment Scheme – you might also be eligible to claim the cost of investing in a new business.
- Research and Development Tax Credit – an exemption for the cost of research and development spent on your business.
You can claim any of the above tax deductions from your self-assessment once you prove they are necessary costs of running the business, particularly useful for lowering your tax liability.
Conclusion
The Class 4 National Insurance is an important tax that self-employed people need to budget for if they’re earning profits over the £12,570 threshold. Contributions are made toward funding essential state benefits like the NHS, state pension, sick pay, and the care system. There is also the option to voluntarily pay NICs if you have gaps in your payment records. You can find out more about Class 4 National Insurance on the GOV UK website.
