Self emloyment and class 4 NICs

tazziegirl_2

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

Pennywise

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

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

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!

tazziegirl_2

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

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

John_Pierpoint wrote: »

"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.