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When you set up as a freelancer, there’s more to it than sending an invoice for your work at the end of each month. In addition to paying tax via self assessment or VAT, you also need to pay your National Insurance contributions. Read on to find out what these are and how it works.
National Insurance is a payment you make to the government to qualify for certain benefits that you might need to claim in your lifetime, including your state pension, maternity benefit and Jobseekers Allowance.
You pay National Insurance if you’re over 16 years old and either earning £162 a week as an employee or, if you’re self employed, more than £6,205 profit a year.
There are different types of National Insurance (NI), called ‘classes’. The type you pay depends on your employment status, how much you earn, and whether you have any gaps in your National Insurance record.
If you’re an employee, you pay Class 1 NI and your company will automatically deduct the payments from your salary. With Class 1a or Class 1b payments, your employer pays for these as part of your package of company benefits.
Self employment and National Insurance
If you’re self employed you pay Class 2 National Insurance, but if you earn less than £6,205 in profit per year this is optional.
Class 3 NI payments are for people wanting to make voluntary contributions so that you don’t have any gaps in your NI record. Gaps could mean you might not qualify for the full State Pension at retirement age.
If you’re self employed and earn more than £8,424 per year, you need to pay Class 4 contributions.
The payment structure is fairly complex, as it takes into account different levels of earnings. For an employed person with an average salary, Class 1 payments are 12 per cent of your gross monthly pay.
For a self employed person earning more than £8,424 but less than £46,350, the Class 2 payment is 9% of your profit.
You can find more details on the government website.
How does a freelancer pay national insurance?
If you’re self employed, your NI bill is calculated at the end of your tax year when you do your self-assessment. But if you’ve set up your freelancing business as a limited company, then you’re a Director, which means you’re classed as an employee.
If you have a limited company, you’ll probably have an accountant who will manage the NI payments as part of your annual accounts.
If you’re both employed and earning on a self-employed basis, you could end up paying more NI than is needed. If you think this is the case, you can apply to HMRC to check your record and claim a refund if you’ve overpaid. Again, talking to an accountant could help you unravel the complexities
and prevent you overpaying in future.