National Insurance for the Self-Employed Explained

October 20, 2023

National Insurance funds state benefits and services such as the state pension and the NHS.

If you don’t pay into the system, you won’t benefit from a full state pension when you get to retirement age, so when you’re self-employed it’s really important you understand what contributions you need to make and how to make them.

There are different classes of National Insurance for different types of workers. It can be confusing! In this article, we explain National Insurance as it relates to Umbrella employment and self-employment via the Construction Industry Scheme.

National Insurance for Umbrella Employees

When you sign up for an Umbrella company, you become an employee of the umbrella company. Your umbrella, just like all employers, is legally obliged to automatically calculate the NI you need to pay and deduct it from your paycheck before passing on your take-home pay to you. This is called Class 1 National Insurance and is based on a percentage of your earnings above certain thresholds.

These rates can be confusing because they start when you earn above a certain level and then vary according to your income. For an accurate calculation of the NI you’ll need to pay, please get in touch for a tailored pay illustration.

As an employer, we also have to pay an Employers’ NI contribution. Both the employee and employer NI contributions will be itemised separately on the ‘pay advice’ page which is provided alongside your payslip.

One of the benefits of joining a compliant, FCSA-accredited Umbrella company like Crest Plus is that you don’t need to worry about paying NI correctly. We’ll make the accurate calculations and payments on your behalf.

NI for self-employed/CIS workers

If you’re self-employed (including via the Construction Industry Scheme) you won’t be subject to Class 1 NI (which, as a reminder, is for employers/employees only). Instead, as you’re self-employed, you’re subject to two classes of NI – Class 2 as well as Class 4. You’ll need to pay both Class 2 and Class 4 NI contributions when you complete your annual self-assessment tax return.

Class 2 contributions are fixed whilst Class 4 contributions are calculated as a percentage of your self-employed profits. You can see current thresholds and rates here, but they are confusing and your contribution will depend on your personal circumstances, so you may find it helpful to speak to a member of our team who will make sense of the rates and thresholds for you!

Paying National Insurance

If you’re with Crest Plus Umbrella, you don’t need to worry about making National Insurance contributions. As stated, as your employer, it is our legal duty to deduct both employee and employer NI contributions each time we pay you. You’ll find the details on each payslip but do get in touch if you have any questions.

If you’re self-employed or working via the Construction Industry Scheme, then you’ll need to calculate and pay Class 2 NI either once a year alongside your self-assessment tax return, or ongoing each week or month. Because of the nature of being self-employed, most people opt for an annual payment which is made when they complete their self-assessment tax return, but the choice is yours.

Your Class 4 National Insurance is calculated as a percentage of your profits and paid as part of your annual self-assessment tax return. This underlines the importance of accurate record keeping of your income and expenses so you can calculate an accurate profit and pay the correct amount of NI.

The return is due by 31st January 2024 and relates to the previous financial year which ends April 5th. So, for example, the self-assessment tax return due 31st January 2024 relates to your earnings April 6th 2022 – April 5th 2023. You don’t have to wait until the January 31st deadline, you can complete your self-assessment tax return any time after April 6th 2023.

If you’d rather leave the calculation to us, then you can use our self-assessment tax return service and we’ll gather the information we need from you and complete the return compliantly and on time, ensuring you receive any tax rebate you may be due in a timely manner.

Plugging gaps in NI contributions

If you’ve had a period in which you’ve not paid National Insurance then you can make up any shortfall by making voluntary contributions, known as Class 3 National Insurance. Failing to make full contributions throughout your working life may affect your state pension entitlement. You can check your state pension entitlement here.

Summary

Hopefully, National Insurance is much clearer to you but we appreciate it’s a confusing area and are happy to help with any queries you may have. We can provide detailed pay illustrations based on your specific circumstances before you begin a new contract, including working out what NI you’d have to pay. Please get in touch with a member of our team on 01244 684700 who will be happy to assist you.

 

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