When you are self employed there are three parts to your “tax” bill. It is important to understand that HMRC deal with the Income Tax and Class 4 National Insurance but Class 2 national Insurance is dealt with by the national insurance office, the weekly payment is the contribution towards a year for your state pension
HMRC are simply advised by the national insurance office if you are self employed and when you started, that way HMRC know how much to collect and send over each year . Think of these as two totally separate organisations. If you don’t fill in the correct forms when you start self employment then the national insurance office won’t know to tell HMRC to collect the Class 2 national insurance.
It will mean no years towards your state pension and any unpaid Class 2 will all be due when they do become aware. HMRC don’t tell the national insurance office you are filing a tax return as self employed
For the tax year 2020/21 (6 April 2020 to 5 April 2021)
1 Income tax is paid on taxable income over £12,500, starting at 20%
2 Class 4 National Insurance (think of this is extra tax) is on taxable profits above £9,500 starting at 9%
3 Class 2 National Insurance is £3.05 and is worked out based on the numbers of weeks self employed in the tax year, this is payable if your taxable profits are above £6,475 , a full year of 52 weeks is £158.60.
Let’s look at some examples assuming a full year of self employment
Taxable self employed profits £20,000
| Income Tax 2020/21 | £1,500.00 | |||
| Class 4 NIC 2020/21 | £945.00 | |||
| Class 2 National Insurance | £158.60 | |||
| Total for 2020/21 | £2,603.60 | |||
Taxable self employed profits £12,000
| Income Tax 2020/21 | £0.00 | |||
| Class 4 NIC 2020/21 | £225.00 | |||
| Class 2 National Insurance | £158.60 | |||
| Total for 2020/21 | £383.60 | |||
Taxable self employed profits £12,000
| Income Tax 2020/21 | £0.00 | |||
| Class 4 NIC 2020/21 | £0.00 | |||
| Class 2 National Insurance | £158.60 | |||
| Total for 2020/21 | £158.60 | |||
Taxable self employed profits £6,000, nothing due but no year is credited for your state pension as you pay no Class 2 National Insurance.
