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When you become a freelancer you have to be aware of the financial obligations you may start having to take responsibility for, including paying your own National Insurance contributions. Here are some tips.
Setting up as a freelancer can be an appealing way to work. Self employment generally gives you more freedom. You have more control of how and when you want to work, which can be a big help in balancing your financial and any family commitments.
But becoming a freelancer does involve a bit research and preparation. There are certain financial obligations – for example, in addition to paying tax via self assessment or VAT, you also need to pay your National Insurance contributions.
By paying National Insurance to the government, you qualify for certain benefits over your lifetime, including your state pension, maternity benefit and Jobseekers Allowance.
You pay National Insurance if you’re over 16 and either earning £162 a week as an employee or, if you’re self employed, more than £6,205 profit a year.
There are different types of National Insurance (NI), called ‘classes’. The type you pay depends on your employment status, how much you earn, and whether you have any gaps in your National Insurance record.
As a freelancer you pay Class 2 National Insurance, but this is optional if you earn a profit of less than £6,205 per year. If you’re self-employed and earn more than £8,424 per year, you need to pay Class 4 contributions.
The payment structure is quite complex because it takes into account various different levels of earnings. For a freelancer earning more than £8,424 but less than £46,350, the Class 2 payment is 9% of your profit. If you earn more than £50,000 in profit, you pay 2% in NI. You can find more details on the government website.
If you’re self employed, your NI bill is calculated at the end of your tax year when you do your self-assessment.
But some people set up a freelancing business as a limited company, which makes the business owner a Director and classes them as an employee. Most limited companies have an accountant to manage their financial commitments. Your accountant will manage NI payments as part of your annual accounts.
If you’re both employed and earning money as a freelancer, you could end up paying more national insurance than necessary. You can apply to HMRC to check your NI records and claim a refund if you’ve overpaid. Speaking to an accountant could help you check whether this is something you need to pursue, and help you avoid overpaying in future.