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Self emloyment and class 4 NICs

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Hi
Please can anybody clarify how the class 4 NICs work when you're self employed.

ie: If I earn 20,000 (profit) in a year, do I still get the £7475 personal allowance before tax is paid, then at what point does the 9% for class4 NICs start? According to the HMRC website its at £7225 which is below the allowance?

Would it be:

20000-7475=12525 taxable pay @ 20%

then 12525 @ 9%??

What are class 4s for anyway? They don't appear to give any extra benefits. Do I really have to pay 29% tax?

Many thanks in advance

Comments

  • Pennywise
    Pennywise Posts: 13,468 Forumite
    Part of the Furniture 10,000 Posts Name Dropper
    The thresholds are different for tax and NIC, so use the £7225 in your calculation for NICs not the tax allowance of £7475.

    Class 4's don't give any benefits - they're just another tax. It's the class 2's that give you entitlements to state benefits. No, you don't have a choice about paying class 4's. You have to think about class 2 and class 4 combined to give your state benefits as class 2 on their own is a very small amount which would nowhere near cover your potential future benefits. After all, employees pay 12% national insurance, so are effectively paying a total of 32% tax!
  • tazziegirl_2
    tazziegirl_2 Posts: 32 Forumite
    Thanks for the quick reply, but I'm still confused:cool:

    So does that mean 20000-7475= 12525 taxed @ 20%

    then 20000- 7225=12775 taxed @ 9%
  • pipscot
    pipscot Posts: 353 Forumite
    tazziegirl wrote: »
    Thanks for the quick reply, but I'm still confused:cool:

    So does that mean 20000-7475= 12525 taxed @ 20%

    then 20000- 7225=12775 taxed @ 9%

    You can always use the calculator at https://www.selfemploymentcalculator.com if you're not sure what tax and NI you'll have to pay.

    Your above calculations are correct! :)
  • Ah thats great thankyou:)

    What was getting me confused is that the nics start below the personal allowance, so you don't get a full personal allowance if you're self employed.

    Thanks for the link as well
  • John_Pierpoint
    John_Pierpoint Posts: 8,401 Forumite
    Part of the Furniture 1,000 Posts
    tazziegirl wrote: »
    Hi
    Please can anybody clarify how the class 4 NICs work when you're self employed.

    ie: If I earn 20,000 (profit) in a year, do I still get the £7475 personal allowance before tax is paid, then at what point does the 9% for class4 NICs start? According to the HMRC website its at £7225 which is below the allowance?

    Would it be:

    20000-7475=12525 taxable pay @ 20%

    then 12525 @ 9%??



    Many thanks in advance

    "You can fool all of the people most of the time"

    When I became self employed, I said something similar to this to the help line:
    What are class 4s for anyway? They don't appear to give any extra benefits.[so it is just another tax?]

    The help line person replied - "I think you understand the situation perfectly sir".

    Do they perhaps cover you in some way for falling off a ladder?
  • Pennywise
    Pennywise Posts: 13,468 Forumite
    Part of the Furniture 10,000 Posts Name Dropper
    "You can fool all of the people most of the time"

    When I became self employed, I said something similar to this to the help line:
    What are class 4s for anyway? They don't appear to give any extra benefits.[so it is just another tax?]

    The help line person replied - "I think you understand the situation perfectly sir".

    Do they perhaps cover you in some way for falling off a ladder?

    It's probably the only way of dealing with NICs for self employed people. It would be better if they just scrapped NICs and had a higher rate of income tax, but I can't see that ever happening.

    I always tell people to regard class 2 and 4 as two parts of the same thing - one part being a fixed rate to count towards benefits and the other part being earnings related. I can't see another way of doing it. There's no point in harping on about the 9% class 4 not giving any benefit - let's face it, the 20% basic rate tax gives no benefit either if you think that way. You have to think of it as being a 29% contribution towards state costs.

    If you scrapped class 2, there'd be people who never paid anything at all if they had low earnings, i.e. 9% of profits over £7k is nil if the profits are under £7k, meaning no state benefit entitlements. If you scrapped class 4, you'd have to massively increase class 2 to make up the funding shortfall which would mean more like £50 per week instead of £2.50 per week, which would cripple any self employed person earning less than the national average, i.e. under say £26k p.a.

    At the end of the day, the NI system is a shambles and is long past its sell by date, but it's what we have and what we have to work with.
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