How to calculate the class 4 NIC liability for self employes? The self-employed pay two classes of National Insurance contributions – Class 2 and Class 4.
What is Class 2 National Insurance Contribution:
Class 2 contributions are weekly flat-rate contributions which provide the mechanism. The self-employed build up their entitlement to the state pension and certain contributory benefits. Class 4 contributions are base on profits from self-employment and operate as a tax, they don’t confer any benefit/pension.
Nature Of Class 4 Contributions, What Is Class 4 N.I Contribution.
Class 4 National Insurance contributions are payable by self-employ earners 16 or over of age and below state pension age. The liability triggers once profits from the self-employment reach the lower profits limit, set at £8,632 for 2019/20. This aligns with the primary and secondary thresholds for Class 1 National Insurance purposes.
Class 4 contributions are payable at the main rate on profits between the lower profits limit and the upper profits limit and at the additional rate on profits in excess of the upper profits limit. For 2019/20, the upper profits limit is set at £50,000, aligning with both the upper earnings limit for Class 1 National Insurance purposes and the rate at which higher rate tax becomes payable.
The main Class 4 rate is set at 9% for 2019/20 and the additional Class 4 rate is set at 2%.
Example 1
John is a self-employ personal trainer. In 2019/20 his profits from self-employment are £7,250.
As his profits are below the lower profits limit, he does not need to pay any Class 4 National Insurance contributions for 2019/20.
However, as his profits exceed the small profits limit of £6,365 for Class 2 National Insurance purposes, he must pay weekly Class 2 contributions of £3 per week.
Example 2
Jane is a self-employ interior designer. In 2019/20 her profits from self-employment are £32,000.
She must pay Class 4 National Insurance contributions on her profits to the extent that they exceed the lower profits limit for 2019/20 of £8,632.
Her Class 4 National Insurance liability is as follows:
9% (£32,000 – £8,632) = £2,103.12
Jane must also pay Class 2 contributions of £3 per week.
Example 3
Jackie is a self-employ accountant. For 2019/20 her profits from self-employment are £77,000. She must pay Class 4 National Insurance contributions on her profits to the extent that they exceed the lower profits limit for 2019/20 of £8,632.
Her Class 4 National Insurance liability is as follows:
(9% (£50,000 – £8,632)) + (2% (£77,000 – £50,000)) = £4,263.12
Jackie must also pay Class 2 contributions of £3 per week.
Paying the Class 4 National Insurance liability
Class 4 National Insurance contributions are payable with tax under the self-assessment system. The due date for paying liability is 31 January after the end of the tax year to which it relates – so Class 4 National Insurance contributions for 2019/20 must be paid by 31 January 2021.
Unlike Class 2 contributions, Class 4 contributions are taken into account in computing payments on account. Payments on the account must are to be made where the previous year’s tax and Class 4 National Insurance liability was £1,000 or more unless at least 80% of the tax due for that year is collected at source. Each payment on account is 50% of the previous year’s liability. Payments on account are due on 31 January in the tax year and on 31 January after the tax year, with any remaining liability (for example where current year’s bill is higher than the previous year’s) whose due date is by 31 January after the end of the tax year.
Additional note: SSCBA 1992, ss. 15 – 18.
