Understanding National Insurance Contributions (NICs): What You Owe & Who’s Exempt

National Insurance Contributions (NICs) play a crucial role in funding the UK’s welfare system, including the State Pension and various benefits. If you’re self-employed, you might be wondering how much you owe, whether you’re exempt, and whether making voluntary payments is a smart move. Let’s break it down in detail.

What Are National Insurance Contributions (NICs)?

NICs are payments made by employees, employers, and self-employed individuals to fund state benefits, including the State Pension, Maternity Allowance, and certain unemployment benefits. If you’re self-employed, you pay NICs differently than employees, specifically through Class 2 and Class 4 contributions.

Understanding which NICs apply to you and how much you need to pay can help you avoid unexpected tax bills while maximising your entitlements.

Do You Need to Pay Class 4 NICs?

If you’re self-employed and earning over £12,570 per year, you are required to pay Class 4 NICs. These contributions are calculated based on your annual profits.

Class 4 NIC Rates for 2024/25:

✅ 6% on profits between £12,570 and £50,270

✅ 2% on profits above £50,270

Good news: These rates won’t change for 2025/26, providing some stability for financial planning.

Who is Exempt from Class 4 NICs?

Not everyone needs to pay Class 4 NICs. You’re exempt if you fall into any of these categories:

❌ Under 16 at the start of the tax year.

❌ Over State Pension age at the start of the tax year.

❌ Trustees, executors, or administrators handling taxable profits.

Important: If you reach State Pension age DURING the tax year, you still have to pay Class 4 NICs for the entire year. Your exemption only starts from the following tax year.

What About Class 2 NICs?

Big change! As of April 6, 2024, Class 2 NICs are NO LONGER mandatory for self-employed people. Previously, Class 2 NICs were a small weekly charge that helped self-employed workers build up entitlement to state benefits.

However, before you celebrate, some people should still consider paying voluntarily.

Why Should You Consider Voluntary Class 2 NICs?

✅ Qualifying for the State Pension: To receive the full State Pension, you need at least 35 qualifying years of NIC payments. If you have gaps in your record, voluntary payments could help secure your future pension.

✅ Protecting Access to Other Benefits: Certain benefits, such as Maternity Allowance and Bereavement Support Payment, depend on your NIC history. Making voluntary contributions ensures you remain eligible.

✅ Affordable Cost: The weekly rate for Class 2 NICs is just £3.45 per week in 2024, increasing slightly to £3.50 in 2025. For a full year, that’s only around £180, which could be a worthwhile investment in your future entitlements.

Who Should Consider Voluntary Contributions?

If you’re self-employed but don’t pay National Insurance through self-assessment, you might need to check your NIC status. This applies to:

• Examiners, moderators, invigilators (who don’t qualify as full-time self-employed)

• Ministers of religion who don’t receive a salary

• People with fluctuating self-employed earnings who might have gaps in their NIC record

  
  

If you fall into one of these categories, making voluntary payments could protect your access to state benefits and pension eligibility.

What Should You Do Next?

If you’re self-employed, understanding and managing your NIC payments is essential to ensure you’re paying the right amount while taking advantage of exemptions and voluntary contributions where necessary.

• Check your National Insurance record via your HMRC account to see if you have any gaps.

• Evaluate whether voluntary Class 2 NICs could benefit you in the long run.

• Plan ahead for your 2025/26 NIC payments, knowing that Class 4 rates will remain unchanged.

Confused about what this means for you? Contact us and we’ll help you figure out if you're paying the right amount, or if you could be saving!