What is Class 4 National Insurance?

What is class 4 national insurance

National Insurance can feel very confusing.

The tax that isn’t called a tax, it comes in many varieties.

It’s enough to make you long for the simplicity of income tax. Just kidding.

Read on to find out:

  • What is Class 4 National Insurance?
  • Who pays Class 4 National Insurance?
  • How much is Class 4 National Insurance?
  • How do I pay my Class 4 National Insurance?
  • Why Class 4 National Insurance is a measure of your success and really exciting

Let’s begin with what is national insurance.

(This article is part of a series on National Insurance. Learn about Class 1 (limited companies and jobs), Class 2 (sole trader) and Class 3 (everyone)).

 

What Is National Insurance?

National Insurance (NI) started as a way to fund a new thing called the state pension and state help for low paid people, the ill and less able. These are called NICs (National Insurance Contributions).

It meant if you were old and couldn’t work, were ill and couldn’t work, or disabled and couldn’t work, you didn’t starve or die from lack of basic health care.

(To get political for a moment, this was common place right into the 1950s which isn’t a very long time ago. The conditions in Call The Midwife give you a good idea.)

This is why National Insurance is a tax that isn’t called a tax because originally it was spreading the cost of care for everyone. Now we still pay for care for everyone (until government dismantles it) but NI goes into general taxation, and general taxation pay for it.

Now wake up if I caught you snoozing, this is the important bit.

 

What Is Class 4 National Insurance?

There are 5 kinds of National Insurance.

Class 1a, Class 1b, Class 2, Class 3 and Class 4. Class 1 is for employment (including if you have a limited company). Class 3 are voluntary contributions.

There are 2 kinds you pay as a self-employed sole trader: Class 2 and Class 4. (For more about self-employed NICs, read here.)

In this article, I’m focusing on Class 4 National Insurance. (This article is part of a series and there are links to articles on Class 1, Class 2 and Class 3 at the end.)

 

Who Pays Class 4 National Insurance?

Class 4 National Insurance is paid by employees and on self-employed taxable profits.

Like with income tax, there is a threshold below which you don’t pay. Unlike income tax, there is an upper limit, so if you are a higher rate tax payer, that’s worth finding out about, although usually your tax return will sort it out for you.

Let’s focus on sole trader profits as that’s you 🙂

When you do your self assessment tax return, the hamster wheels of HMRC turn and calculate the amount of tax they say you owe them.

Have you looked at the tax breakdown they give you of how much they want for each kind of tax? That’s where you’ll find Class 4 National Insurance.

  1. HMRC look at your self-employed taxable profits
  2. If your self-employed taxable profits are above the threshold (around £7.5k in 2015), they charge you 9% of your taxable profits in Class 4 National Insurance

There are exceptions:

  1. You pay a lot of National Insurance in your job so you may already be paying the maximum. In this case, you are charged a lower rate and/or defer the Class 4 National Insurance tax due
  2. You’ve done (legal and ethical) smart things with your tax return to lower your taxable profits so they go below the Class 4 National Insurance threshold.

Class 4 National Insurance is a profits tax.

That’s why I recommend saving 30%. Basic rate income tax + Class 4 National Insurance = 29%. (More about saving here and saving for tax here).

 

How much is Class 4 National Insurance?

As I explained above, Class 4 National Insurance is 9% of your taxable profits above the threshold.

Remember that your taxable profits are lower than your profits, because you don’t get tax relief for all your expenses, and tax relief doesn’t mean free.

If your brain is fogging over, let me give a couple of examples.

Your business income (turnover) = £34,000

Your business costs (expenses + capital items) = £10,000

Your business profit = £24,000

 

Your business income for your tax return = £34,000

Your tax-deductible costs = £6,000

Your taxable business profit = £28,000

 

Taxes due:

Income tax at 20% = £28,000 – income tax allowance (assuming it isn’t being used elsewhere, like a job)

Class 4 National Insurance at 9% = £28,000 – Class 4 National Insurance threshold

 

rosie-slosek-1287-lres smallerLet’s see what happens with help from a coach:

 

Your business income for your tax return = £34,000

Your tax-deductible costs before asking for help = £6,000

Your taxable business profit = £28,000

Income tax and Class 4 NI due = approx £5,600 if you don’t have a job, approx £7,600 if you do

 

Your tax-deductible costs after asking for help and including the cost of the investment = £8,000

Your taxable business profit after asking for help = £26,000

Income tax and Class 4 NI due = approx £4,900 if you don’t have a job, approx £6,900 if you do

Saving = £700 and you’ve already paid for your investment

 

Let’s not leave it up to HMRC’s hamster wheel and your fear of tax to decide how much tax you pay.

Contact me, have a look at my sole trader and tax return packages or read my article How Can I Pay Less National Insurance?

 

How Do I Pay Class 4 National Insurance?

You pay your Class 4 National Insurance by your tax return.

HMRC will calculate how much you owe and then you pay it as part of your overall tax bill. Easy.

Top tip: Remember that if you do your tax return earlier in the year, you don’t need to pay until 31 January.

(If you’re due a refund, the earlier you do your tax return, the earlier you’ll get your money. You won’t need to wait until January).

 

Why Class 4 National Insurance Is A Measure Of Your Success

Class 4 National Insurance is actually one of the most exciting successes in your business and possibly the best tax there is.

Have I lost the plot? Let me explain.

Fear of tax can be a way of self-sabotaging

It’s not as crazy as it sounds.

When you don’t understand how tax works, it’s unknown, it’s scary, it’s those billboards telling you you’ll go to prison if you don’t do everything perfectly first time.

Logically, rationally, we know that’s not what they mean. They mean people who know they are cheating, who know they are committing fraud.

Try telling that to your fear.

I understand. I understand that fear that stops you doing what you want to do.

It’s very common, even if it’s not talked about much.

I’ve had clients who were terrified HMRC was going to send them to prison even when I could see they were doing all they needed to.

The difference was they didn’t know they were doing what they needed to, as they didn’t know what they needed to know for them, and being honest people who cared, they were sensitive to public threat and fear messages in a way I’m sure HMRC never meant. Can you relate?

I have clients who sabotaged their business because they were terrified if they made more than a pittance the tax would become too complicated and they wouldn’t be able to cope.

They’d make a mistake and Bad Things Would Happen. It sounds silly to someone who doesn’t understand, but fear isn’t very good at description, so it has a very large Bad Things section. The fact it makes us feel like idiots doesn’t seem to occur to it.

Sod off Fear.

We know you’re there and we’re getting help.

 

Class 4 National Insurance is your success

It’s important to have a business that supports you financially and emotionally.

When your taxable profits reach Class 4 NI, that’s a step to celebrate!

It’s such an important step.

No-one gets to 6 or 7 figures without making it to paying tax on their 4 or 5 figures first.

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Would you stop your baby learning to walk because you were scared of them getting injured in a marathon in their 30s?

Of course you wouldn’t. You tell everyone when your baby takes their first step, their first steady step, the first time they walk from daddy to mummy on their own.

That’s what you do with your business.

You celebrate each step and you ask for help and support when you need it. There are lots of fabulously supportive communities out there waiting to be there for you (I have one as part of my Tax Return Coaching).

 

You’re Paying Class 4 National Insurance? Congratulations!

Celebrate Class 4 National Insurance with champagne

Buy a mini bottle of pink champagne or buy a BIG bottle!

Spray it about like a racing car driver, get soaked in bubbles, you’re a grown up business owner paying tax on your profits!

Put on your tiara, your best dress, your onesie, dance around the sofa, dance around the park, get a takeaway, roast an organic free range chicken, go crazy in Paperchase, tell everyone in your favourite business freelance groups.

(Yes, I did mention go crazy and buy stationery. It’s a tax-deductible business expense).

Celebrate!

 

Class 4 NI isn’t bad at all when you understand.

Book a 1:1 package and transform your confidence and unblock your fear. Download free resources and start tracking your business numbers in the next 2 minutes.

 

Celebrating paying Class 4 National Insurance for the first time?

Share with me on FacebookTwitterInstagram or leave a comment.

This article is part of a series on National Insurance. Learn about Class 1, Class 2 and Class 3.
(Examples are approximate, because examples depend on all your taxable income, not just your self-employed earnings).

 

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Comments

  1. This is so baldly written and it is so confusing. You have adopted the “less is more” – wrong approach. Please supplement with explanations – people read this at the end of the working day – there’s no time for cuteness or riddles.

  2. Hi Emilce, I can’t write for everyone’s preferences. There are lots of other folks writing on National Insurance which may be more suited to your personal style. Thanks, Rosie.

  3. After feeling bad about the biggest Class 4 NI bill ever since starting my business, your article has made me feel really happy that although I pay more tax, it means my business is booming!
    Thanks!

  4. Thanks Felicity. I had a look at your website and it looks really good. I love horses 🙂 Rosie

  5. Thanks so much for this article, I came for the tax advice but to be honest I think I enjoyed your humour above all!
    PS
    I can’t believe the negative comment you got above, some people are so ungrateful!

  6. Thanks Subha, clearly not someone who ‘gets’ me 🙂

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