There are so many types of taxes that you should be aware of in order to run your business seamlessly. Self-employed people have a double responsibility to run their business and avoid any tax hurdle in the process. In the case of self-employment, income tax is not the only tax you have to worry about. You would have to make National Insurance contribution in parallel, but for your own good. NI contribution is for your own benefit; NI entitles you to the state pension. You can claim other benefits too. But your home calculator may not show you the exact calculations. National Insurance Contribution has to be worked out. Here are some steps you must follow:
What is National Insurance?
This is the kind of contribution that people in the UK pay to get old-age benefits which include state pension and other support allowances. The contribution has been divided into different classes based on the income threshold.
What do you have to know if you are self-employed?
Who pays National Insurance Contribution and who does not? In all cases, if you are an employee, employer, or self-employed person, you have to pay NI contributions until the retirement age. People on the payroll system do not have to worry about it, because it will be taken automatically. However, self-employed people have to go through their self-assessment returns to work out NIC payments.
What kind of National Insurance contributions do you have to pay?
It all depends on your profits. If you are self-employed and making profits then you’ll pay NIC. It’s simple math, if you are making a lot of money, you have to pay more NI. Based on the profit-making, the National Insurance contribution has been divided into 4 classes.
You will find most people paying Class 2 and Class 4 contributions. So, if you are crossing the lowest threshold you have to pay less, and a higher rate will be applicable if you are making a lot of money. You won’t have to pay if you are making class 2 money below the Class 2 threshold.
How does Class 2 work if you are self-employed?
Class 2 includes your income if you are self-employed, but it also incorporates any investment activity. This includes property letting, but it doesn’t necessarily mean that only one property letting will contribute to your proper business activity.
How can you register for Class 2 and 4 NIC?
The registration process does not require a separate procedure. Your self-employment registration with HMRC includes both income tax and National Insurance.
How much do you have to pay for Class 2?
You have to pay fixed Class 2 NIC weekly which is around £3.05 per week for 2020/21. This is applicable if your profits are above that small profit threshold. This amount is based on the number of weeks you are self-employed in a tax year.
If you will get self-employed on February 1 next year you would have to count the weeks between January 2021 to April 2021, which means that you have to pay for Class 2 NIC for 9 weeks.
What about Class 4?
Class 4 is simply based on the amount of profit you are making on your business. This means that you only have to pay for Class 4 if your profits are crossing a certain threshold. The threshold amount for the year 2020/21 is £9,500.
What is the Voluntary National Insurance?
Voluntary National Insurance means that you’re making contributions even if your income falls below the Class 2 threshold. This will benefit you in the long run. When you are making contributions that way; you are avoiding any gaps in your payment history. These gaps impact your pension, if you don’t have enough years of contributions, you will not receive a state pension.
You can also make Class 3 voluntary contributions. The rates will be higher and you will be stripped off certain benefits. The deadline for Class 3 contributions is the same every year i.e April 5. You can make Class 3 voluntary contributions for the past 6 years.
Do you need help with your taxes and don’t know where to go? then stop getting worried about it and contact Cheap accountants in London right away.