Sole trader national insurance
Discussion
I've been running my own part time business for a few years while working part time PAYE and drawing 2 company pensions. Profit was below the threshold, so I had a small earnings exemption certificate and didn't pay NIC on the self employment.
I have now gone full time self employed, giving up the PAYE job last November. My accounting period follows the tax year. 2018/19 will be below the low earnings limit, but 2019/20 profit is projected at around £10k. Pension is £7.6k.
I am 61, and have already paid enough years to qualify for the maximum state pension, less about £15 per week because I was contracted out during a previous employment.
What's the situation with NIC going forwards? Do I have to do anything, or will HMRC just bill me for any compulsory NICs?
I phoned HMRC before christmas as soon as I received my P45, told them I'd gone fully self employed, and asked them to reassign my tax code to my pension. I received a bill for tax owed from 2017/18 (which they were going to collect via PAYE during 2019/20) which I have paid.
I'll be speaking to an accountant in the next week or so, just wondering what I can expect with NICs
I have now gone full time self employed, giving up the PAYE job last November. My accounting period follows the tax year. 2018/19 will be below the low earnings limit, but 2019/20 profit is projected at around £10k. Pension is £7.6k.
I am 61, and have already paid enough years to qualify for the maximum state pension, less about £15 per week because I was contracted out during a previous employment.
What's the situation with NIC going forwards? Do I have to do anything, or will HMRC just bill me for any compulsory NICs?
I phoned HMRC before christmas as soon as I received my P45, told them I'd gone fully self employed, and asked them to reassign my tax code to my pension. I received a bill for tax owed from 2017/18 (which they were going to collect via PAYE during 2019/20) which I have paid.
I'll be speaking to an accountant in the next week or so, just wondering what I can expect with NICs
Pension income is not classed as earned income so is not subject to NI.
If your self employed profits are over the relevant thresholds you will pay Class 2 and Class 4 NI on those profits. The current threshold for Class 2 is annual taxable profits over £6,365. The threshold for Class 4 is £8,632.
Class 2 is a fixed amount of £156.00 per annum and Class 4 is 9% of profits over £8,632.
Both Class 2 and Class 4 are paid as part of the overall Self Assessment "tax" bill.
Class 2 used to be collected monthly or quarterly but that ceased a couple of years ago. At one point the government was intending to abolish Class 2 completely but they have now changed their mind.
If your self employed profits are over the relevant thresholds you will pay Class 2 and Class 4 NI on those profits. The current threshold for Class 2 is annual taxable profits over £6,365. The threshold for Class 4 is £8,632.
Class 2 is a fixed amount of £156.00 per annum and Class 4 is 9% of profits over £8,632.
Both Class 2 and Class 4 are paid as part of the overall Self Assessment "tax" bill.
Class 2 used to be collected monthly or quarterly but that ceased a couple of years ago. At one point the government was intending to abolish Class 2 completely but they have now changed their mind.
clockworks said:
Thanks Eric.
Seems a bit unfair when the exemption I had previously meant I could earn about £13k before paying NI on a mix of PAYE and self employment though. I haven't had to pay NI at all for the past 8 years.
Oh well, at least I know what the rules are now.
Unlike income tax, NI is based on a job by job assessment and not overall global income.Seems a bit unfair when the exemption I had previously meant I could earn about £13k before paying NI on a mix of PAYE and self employment though. I haven't had to pay NI at all for the past 8 years.
Oh well, at least I know what the rules are now.
They are two very different systems.
markcoznottz said:
Let's be honest hmrc would love to get more NI out of the self employed, a massive increase was planned a while back but Hammond bottled it last minute.
The proposed increase was to Class 4. This was to compensate for the abolition of Class 2.The problem was that the actual LEGAL NI for Self Employed individuals is Class 2. It is Class 2 that provides the actual contributions that count for state pension entitlement. Class 4 is nothing more than an additional levy on sole trader profits and does not generate any pension entitlement. In order to abolish Class 2, Class 4 had to be changed to become the main pension entitlement generator for the self employed. That proved too difficult due to the complexity of the legislation, so the abolition of Class 2 was abolished.
To add an additional question to this. Say your were employed earning £25000. Your tax free amount is used up through paye, if you have your own business with a profit of £10000 you would instantly be in the 20% category and you would have to pay 9% class 4 contributions on that £10000?
slipstream 1985 said:
To add an additional question to this. Say your were employed earning £25000. Your tax free amount is used up through paye, if you have your own business with a profit of £10000 you would instantly be in the 20% category and you would have to pay 9% class 4 contributions on that £10000?
Income Tax looks at your income from all sources. So, in the example you give above, your self employed profits would be fully taxable at 20% because your salary had already absorbed all of your personal tax allowance.NI is different.
The NI you pay on your employment income (Class 1) is based purely on whether your employment income FROM THAT EMPLOYMENT exceeds the NI threshold.
You will pay Class 2 NI and/or Class 4 NI only if your SELF EMPLOYED profits exceeds the respective thresholds for Class 2 or Class 4 NI.
Interesting. So if I had three part time PAYE jobs paying £5k each, I wouldn't pay any NI, because each one is assessed individually?
If I had three unrelated small businesses, each making £5k profit, they would be assessed together, and I would pay NI on the amount over the threshold?
I can see the logic of lumping self employment income into one pot, but the PAYE jobs being assessed separately doesn't make sense. Someone doing multiple part time jobs will have more in their pay packet, but presumably lose out on state pension.
If I had three unrelated small businesses, each making £5k profit, they would be assessed together, and I would pay NI on the amount over the threshold?
I can see the logic of lumping self employment income into one pot, but the PAYE jobs being assessed separately doesn't make sense. Someone doing multiple part time jobs will have more in their pay packet, but presumably lose out on state pension.
clockworks said:
Interesting. So if I had three part time PAYE jobs paying £5k each, I wouldn't pay any NI, because each one is assessed individually?
If I had three unrelated small businesses, each making £5k profit, they would be assessed together, and I would pay NI on the amount over the threshold?
I can see the logic of lumping self employment income into one pot, but the PAYE jobs being assessed separately doesn't make sense. Someone doing multiple part time jobs will have more in their pay packet, but presumably lose out on state pension.
All correct.If I had three unrelated small businesses, each making £5k profit, they would be assessed together, and I would pay NI on the amount over the threshold?
I can see the logic of lumping self employment income into one pot, but the PAYE jobs being assessed separately doesn't make sense. Someone doing multiple part time jobs will have more in their pay packet, but presumably lose out on state pension.
NI and tax are very different animals with different philosophies behind them. Also, don't forget that NI purely relates to "earned income" only whereas income tax relates to almost all your income from all sources (with some exceptions).
For example, if an individual has a combination of salary, self employed income, share of partnership profit, rental income, dividends and interest - ALL of these amounts will be added together to arrive at his taxable income.
For NI purposes, only the salary, sole trader profits and partnership profits will be taken into account and even then each source will be considered separately for NI calculation purposes.
Thanks Eric, it's becoming clearer.
Another question though:
My state pension projection is about £15 a week below the normal figure of £156 (I think) because during a previous PAYE employment I was contracted out (of SERPS?). As my self employment income going forwards will definitely be above the class 2 threshold, and possibly above the class 4 threshold (depending on allowable expenses), will making class 2 contributions for the next few years give me an increased state pension. That is, will I be effectively buying back my "missing/reduced" years?
Another question though:
My state pension projection is about £15 a week below the normal figure of £156 (I think) because during a previous PAYE employment I was contracted out (of SERPS?). As my self employment income going forwards will definitely be above the class 2 threshold, and possibly above the class 4 threshold (depending on allowable expenses), will making class 2 contributions for the next few years give me an increased state pension. That is, will I be effectively buying back my "missing/reduced" years?
I don't know much about the nitty gritty details of how contributions actually work towards building up your entitlement. To be honest, I don't think that there are that many people who work for the Department of Work and Pensions who know that much about this either.
I've only ever known one person who actually REALLY knew how NI worked regarding building up entitlement - and that was a chap called Neil Booth who has written a n umber of books on NI.
I went to a lecture of his about 20 years ago.
I've only ever known one person who actually REALLY knew how NI worked regarding building up entitlement - and that was a chap called Neil Booth who has written a n umber of books on NI.
I went to a lecture of his about 20 years ago.
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