Although it’s not the most exciting part of starting up your own small business, being aware of the practicalities is essential. Tax is a huge and very necessary part of this and, unfortunately, there isn’t just one type of tax, there’s a quite a few. The key types you’ll need to brush up on when you have a small business are; corporation tax, income tax, VAT and let’s not forget National Insurance payments.
To give you a hand, and help you get to the information that matters, we’ve pulled together this guide on national insurance tax. So you can focus on turning your passion into a successful enterprise instead of getting lost in legalities.
But what is National Insurance anyway? And do small businesses pay National Insurance? We’ll cover exactly what National Insurance is and if you need to pay it in this handy guide.
What is National Insurance tax?
National Insurance is different from the other taxes because it relates largely to pensions and other state benefits including maternity allowance. It was introduced in 1911, initially as a kind of insurance (hence the name) against illness and unemployment, but eventually included retirement pensions and other benefits as well.
Do I have to pay National Insurance for my business?
In the UK, you are legally required to pay National Insurance if you are over 16 years old and are either:
● Earning more than £242 a week as an employee
● Earning more than £11,908 in profit in a year while self-employed
So how does National Insurance affect a business? For limited company directors, National Insurance payments are taken as part of PAYE, while sole traders need to pay it through their annual self-assessment tax process. You’ll pay it at the same time as you pay your Income Tax and these payments will end when you reach pension age.
Employers also need to pay contributions towards their employee’s National Insurance.
What percentage is National Insurance?
So, the chances are that you will have to pay National Insurance while running a small business, but what are the business National Insurance rates? As with employee rates, they are divided up into different classes and this determines the percentage you have to pay.
This is how they work:
Class 1 National Insurance Rates
As we mentioned above, if you’re an employee you will start paying National Insurance when you earn more than £242 a week and the rate you pay depends on how much you earn. For the tax year 2022/23 it’s broken down into the following:
● 12% of your weekly earnings between £242 and £967
● 2% of your weekly earnings above £967.
To complicate matters slightly, there was a rise in National Insurance rates in April 2022 that took it up to 13.25% but this was reversed in November 2022, reverting them back to 12%. Employee Class 1 NI contributions are managed by their employers, deducting it from their wages before they are paid it into their accounts.
Employers also need to pay towards their employee’s Class 1 contributions. The amount required to be paid is determined by what category each employee falls into (for example, apprentices under 25 would be category H, employees over the state pension age would be category C, and most people are category A) and how much of their earnings fall into various pay bands.
This starts out at 0% for those paid between £533 and £758 each month, rising to 13.8% for those paid over £4,189 a month.
Class 2 National Insurance Rates
These are the rates you are likely to pay if you are self-employed and earning profits of more than £11,908. The rate for Class 2 National Insurance is currently £3.15 a week.
The increase to National Insurance rates that took effect in April 2022 will be reversed from 6 November 2022. This will mean the main rate for National Insurance will revert to 12% from 13.25% from 6 November 2022. The increase in National Insurance thresholds this year are not being altered and will remain the same for the 2022/23 tax year.
Class 3 National Insurance Rates
If your profits are less than £6,725, you can choose to pay voluntarily to avoid having gaps in your National Insurance record. These gaps can be because of any of the following reasons:
● You were employed but had low earnings
● You were unemployed and not claiming benefits
● You were self-employed but did not pay because of small profits
● You were living or working outside the UK
Having gaps in your National Insurance record can be a problem because it can mean you haven’t built up enough years of contributions to get the full State Pension when you reach retirement age or could miss out on some other related benefits.
Class 4 National Insurance Rates
This is the other National Insurance rate most self-employed people need to pay. You are required to pay Class 4 National Insurance if your profits are £11,909 or more a year and there are two levels of rates dependent on how much profit you have made:
● You pay 9.73% on profits between £11,909 and £50,270
● You pay 2.73% on profits over £50,270
What small business National Insurance relief is available?
Because National Insurance is based on how much profit you make while self-employed, there is at least the reassurance that you don’t need to pay if you aren’t making enough profit to afford it.
However, there is other small business National Insurance relief out there, like the Employment Allowance, which lets eligible employers reduce their liability by up to £5,000 and is designed to help smaller employers.
You are eligible to claim if you are:
- Registered as an employer
- A sole trader, limited company or partnership with employees
- A limited company with only directors where two or more earn more than the secondary threshold for Class 1 NI contributions.
- Your Class 1 NI liabilities were less than £100,000 in the previous year
The allowance applies to the business, rather than individual employees and only to one payroll within the business. You can claim at any point during the tax year and will pay less NI contributions each month until you’ve reached the £5,000 total.
For more information on small business tax relief that you could be eligible for, check out our Small Business Tax Relief guide.