Class 4 National Insurance (NI) is a type of NI that is paid by self-employed individuals in the UK. It is a way of contributing to the UK’s social security system and entitles you to certain benefits, such as the State Pension.
In this guide, we will explain what Class 4 NI is, how it is calculated, and how to pay it.
Class 4 NI is calculated based on your profits from self-employment. You will need to pay Class 4 NI if your profits are over a certain amount. The amount of Class 4 NI that you pay will depend on your level of profits.
Introduction
Class 4 National Insurance is a type of tax paid by self-employed individuals in the United Kingdom. It is a contribution to the National Insurance system, which provides benefits such as the State Pension, unemployment benefits, and maternity allowance.Class 4 National Insurance is calculated on profits from self-employment, and is paid in addition to Class 2 National Insurance.
The amount of Class 4 National Insurance you pay depends on your profits and the rate of Class 4 contributions.There are a number of benefits to paying Class 4 National Insurance. These include:
- Qualifying for the State Pension
- Building up National Insurance credits towards other benefits, such as unemployment benefits and maternity allowance
- Increasing your National Insurance record, which can affect your entitlement to certain benefits in the future
Who is required to pay Class 4 National Insurance?
You are required to pay Class 4 National Insurance if you are self-employed and your profits are over a certain threshold. The threshold for Class 4 National Insurance is currently £9,568 per year.If you are self-employed and your profits are below the threshold, you are not required to pay Class 4 National Insurance.
However, you may still choose to pay Class 4 National Insurance voluntarily, in order to build up your National Insurance record.
Calculation of Class 4 National Insurance
Class 4 National Insurance (NI) is a tax paid by self-employed individuals in the UK on their profits. It is calculated based on the individual’s net profit, which is the profit after deducting allowable expenses from their business income.
The Class 4 NI rate for the 2022/23 tax year is 10.25%. This means that for every £1 of net profit, self-employed individuals will pay 10.25p in Class 4 NI.
Table of Class 4 National Insurance Contributions
The following table shows examples of different income levels and the corresponding Class 4 National Insurance contributions:
| Net Profit | Class 4 National Insurance |
|---|---|
| £10,000 | £1,025 |
| £20,000 | £2,050 |
| £30,000 | £3,075 |
| £40,000 | £4,100 |
| £50,000 | £5,125 |
It is important to note that Class 4 NI is only payable on profits above the Small Profits Threshold. For the 2022/23 tax year, the Small Profits Threshold is £11,908.
Impact of Profits and Losses on Class 4 National Insurance Contributions
If a self-employed individual makes a loss in a tax year, they will not be liable to pay Class 4 NI. However, if they make a profit in a subsequent tax year, they may be liable to pay Class 4 NI on the profits from both years.
For example, if a self-employed individual makes a loss of £5,000 in the 2022/23 tax year, they will not be liable to pay Class 4 NI. However, if they make a profit of £15,000 in the 2023/24 tax year, they will be liable to pay Class 4 NI on the profits from both years, i.e.,
£2,050.
Payment of Class 4 National Insurance
Class 4 National Insurance contributions are paid through self-assessment. You can make payments online, by phone, or by post. The deadline for payment is 31st January following the tax year in which the income was earned.
Online Payment
- Go to the HMRC website and log in to your online account.
- Select ‘Self Assessment’ from the menu.
- Click on ‘Make a Payment’.
- Enter the amount you want to pay and select ‘Class 4 National Insurance’ from the dropdown menu.
- Click on ‘Make Payment’.
Consequences of Late Payment
If you do not pay your Class 4 National Insurance contributions on time, you may have to pay a penalty. The penalty is 10% of the unpaid contributions, plus interest. You may also be charged a daily penalty if you do not pay within 30 days of the due date.
Class 4 National Insurance and Self-Employment
Class 4 National Insurance is a tax paid by self-employed individuals in the United Kingdom. It is similar to Class 1 National Insurance, which is paid by employees, but it is calculated differently. Class 4 National Insurance is based on the profits from self-employment, and it is used to fund the National Insurance system, which provides benefits such as the state pension and unemployment benefits.
Types of Self-Employment Income Subject to Class 4 National Insurance
The following types of self-employment income are subject to Class 4 National Insurance:
- Trading profits
- Professional fees
- Commission
- Royalties
- Other income from self-employment
How Class 4 National Insurance Contributions Can Affect Self-Employed Individuals
Class 4 National Insurance contributions can affect self-employed individuals in a number of ways:
- They can reduce the amount of profit that is available to the individual.
- They can increase the individual’s tax liability.
- They can affect the individual’s entitlement to certain benefits, such as the state pension.
Class 4 National Insurance and Limited Companies
Class 4 National Insurance (NI) is a type of NI that is paid by self-employed individuals in the United Kingdom. It is similar to the NI contributions that are paid by employees of limited companies, but there are some key differences.
One of the main differences between Class 4 NI and NI contributions paid by employees is the rate of contribution. The Class 4 NI rate for 2022/23 is 9%, while the employee NI rate is 12%. This means that self-employed individuals pay a lower rate of NI than employees.
Another difference between Class 4 NI and NI contributions paid by employees is the way that they are calculated. Class 4 NI is calculated on the profits of a self-employed individual, while employee NI is calculated on their salary. This means that self-employed individuals only pay NI on the profits that they make, while employees pay NI on their entire salary.
There are also some tax implications to consider when paying Class 4 NI as a director of a limited company. For example, Class 4 NI is not deductible for corporation tax purposes. This means that directors of limited companies will need to pay Class 4 NI out of their post-tax income.
There are both advantages and disadvantages to paying Class 4 NI as a director of a limited company. Some of the advantages include:
- Lower rate of contribution than employees
- Only pay NI on profits
- More control over NI payments
Some of the disadvantages include:
- Not deductible for corporation tax purposes
- Can be more complex to calculate
- May not be eligible for certain benefits
Ultimately, the decision of whether or not to pay Class 4 NI as a director of a limited company is a complex one. There are a number of factors to consider, including the individual’s financial situation, the company’s tax status, and the level of benefits that the individual is eligible for.
Class 4 National Insurance and Retirement
Class 4 National Insurance (NI) contributions can significantly impact an individual’s retirement benefits. Understanding how these contributions affect retirement planning is crucial for self-employed individuals and those running their own limited companies.
Individuals who have paid Class 4 NI contributions are eligible for a range of retirement benefits, including the State Pension, Additional State Pension, and Pension Credit.
State Pension
The State Pension is a weekly payment provided by the government to individuals who have reached state pension age and have made sufficient NI contributions.
- To qualify for the full State Pension, an individual must have 35 qualifying years of NI contributions.
- Each year of Class 4 NI contributions counts as a qualifying year for the State Pension.
Additional State Pension
The Additional State Pension is a top-up to the State Pension for individuals who have made additional NI contributions above the basic level.
- Class 4 NI contributions can be used to increase an individual’s Additional State Pension.
- The amount of Additional State Pension an individual receives depends on the number of years they have made additional NI contributions and the amount of those contributions.
Pension Credit
Pension Credit is a means-tested benefit that provides additional income to low-income pensioners.
- Class 4 NI contributions can affect an individual’s eligibility for Pension Credit.
- Individuals who have made Class 4 NI contributions may be able to receive a higher rate of Pension Credit.
Conclusion
Class 4 NI is an important part of the UK’s social security system. By paying Class 4 NI, you are contributing to your future benefits and helping to support the UK’s welfare state.
FAQ Section
What is Class 4 National Insurance?
Class 4 National Insurance is a type of NI that is paid by self-employed individuals in the UK.
How is Class 4 National Insurance calculated?
Class 4 NI is calculated based on your profits from self-employment.
How do I pay Class 4 National Insurance?
You can pay Class 4 NI online or by post.
What are the benefits of paying Class 4 National Insurance?
By paying Class 4 NI, you are contributing to your future benefits and helping to support the UK’s welfare state.
