If you’re new to freelancing and have previously been an employee, getting to grips with the taxes you must pay as a self-employed person can be a headache. Most employees have everything taken care of for them by their employer through Pay as You Earn (PAYE), but self-employed freelancers have to take responsibility for paying their own taxes.
In amongst the calculations for your tax bill you’ll also spot National Insurance (NI), and this is just another tax that needs to be paid.
The bright side is that most freelancers find the advantages of being self-employed more than compensate for having to sort out your own tax. There are also tax allowances, and you can claim tax relief against any business expenses too.
We always recommend you enlist the help of an accountant, especially in the early stages of becoming a freelancer, as they’ll advise you on the records you need to keep and the expenses you can claim to reduce your taxable income.
To help start you off, we’ll look at National Insurance for freelancers, how much it is, and how it’s calculated and paid.
What is National Insurance?
NI is an additional tax that individuals, who have earned income from employment or self-employment, pay in addition to their income tax. It is supposed to help fund the NHS and state benefits such as pensions, unemployment and sickness benefit, and maternity pay.
The important thing for you as an individual, is that paying NI qualifies you for certain state benefits that wouldn’t be available if you don’t pay it, such as the State Pension.
The different classes of National Insurance
There are 4 different types, or ‘classes’, of NI depending on how you earn the money that you need to pay NI on.
The two that most affect self-employed freelancers are Class 2 and Class 4. Class 3 is a voluntary NI class that allows you to pay voluntary contributions to top-up your NI record if it’s incomplete. For instance, if you go through a prolonged period of unemployment, low income, or non-residence.
- Class 2: Once your self-employed earnings reach the Lower Profits Limit, you’ll pay Class 2 NI as a weekly flat rate.
- Class 3: A voluntary contribution that can be paid to avoid or fill gaps in your NI record. You can check your eligibility to pay Class 3 contributions, and how much it will cost, on HMRC’s website.
- Class 4: This is a profit-based contribution payable as a percentage of your self-employed earnings once they reach the Lower Profits Limit.
If you work for an employer then you might also pay Class 1 NI, but this will be deducted by your employer and paid through the PAYE system. You won’t need to pay it twice, but you will need to include it on your tax return so HMRC can see what you earned, and what you already paid.
How much National Insurance will I pay?
This is a flat rate of £3.15 per week (applied to the whole tax year) regardless of how much you earn over the threshold.
Class 4 NI is based on your profits. You won’t pay Class 4 on the self-employed income you earn below the Lower Profits Limit, but you will pay it at a rate of 10.25% on earnings between the LPL and the Upper Profits Limit. Earnings above the UPL will incur Class 4 NI at a rate of 3.25%. Sort of.
We say, ‘sort of’, because of the recent announcement around the Health and Social Care Levy.
A note on The Health and Social Care Levy
An additional 1.25% levy was brought in from April 2022 to cover additional costs following Covid, and to help fund a gap in paying for social care. This was introduced as a rise in National Insurance which was due to end in April 2023, and then be replaced by a separate 1.25% levy.
However, following the recent mini budget by the new Chancellor of the Exchequer, the Health and Social Care Levy has been reversed. From 6th November 2022 the above rates for Class 4 NI will be reduced by 1.25% for the remainder of the tax year and will remain at the lower level for 2023.
How is my NI contribution calculated?
As a self-employed freelancer it’s fortunately more straightforward than it looks! When you complete your Self Assessment tax return HMRC automatically calculates your Class 2 and Class 4 NI contribution and adds it to your overall tax bill, which is then payable at the same time as your income tax falls due.
So, although Class 2 NI is quoted as a weekly amount, you don’t pay it weekly or monthly, it’s added to your tax bill along with your Class 4 contribution once it’s been calculated.
When is my self-employed NI due?
The deadline for paying your self-employed National Insurance is the same as paying your tax bill, and submitting your Self Assessment tax return: 31st January in the year which follows the tax year you are submitting for.
For example, the 2021/22 tax year ended 6th April 2022, and the deadline to submit your return and pay the bill is 31st January 2023.
It might seem like you have a long time to pay and get everything organised, but as a self-employed person it’s usually better to try and get it done sooner. That way you have more time to deal with any unexpected surprises, and make sure you claim all those allowable expenses!
Submitting your return early doesn’t mean you need to pay your bill early though – the payment deadline won’t be affected. In fact, if HMRC owe you money, you’ll get it back sooner!
It’s also worth looking into bookkeeping software which works out your tax liability as you go, so you always know where you’re up to.
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