What are Class 4 National Insurance Contributions?

Class 4 National Insurance (NI) contributions are paid by anyone who is self employed. You should note that by using the term self employed I am referring to a self employed sole trader rather than someone who paid through a limited company. In the latter case you will not be classed as self employed but treated as an employee of your limited company. Here at Cheaper Accountant we come across many directors of limited companies who automatically assume that they are self employed but this is not the case from a tax point of view.

Who pays Class 4 NI Contributions?
Class 4 NI contributions are paid by self employed sole traders. Your actual class 4 NI bill will be calculated with reference to your actually sole trader profit for the tax year. Remember that the tax year runs from 6th April to 5th April in the following year and sole trader profits must be calculated over this period of time. The amount of class 4 NI you will pay will be 9% of your profit over the year for profits falling between £7,605 and £42,475 (these rates apply to the 2012/13 tax year). Furthermore, if you make a sole trader profit in excess of £42,475 over the course of the year in question you will be required to pay a further 2% on the amount of profit over and above £42,475.

When do I need to pay these Contributions?
Your class 4 NI contributions are calculated as part of your annual tax return and they will be payable alongside your income tax. A benefit of completing your tax return online is that these NI contributions will be calculated automatically for you.

Could I be exempt from paying Class 4 NI?
Yes you could. There are a number of exemptions available that will prevent anyhow who meets the criteria from paying class 4 NI contributions. The exemptions are as follows:
  • Your annual sole trader profit is less than £7,605;
  • You are under the age of 16;
  • You are older than the state pension age;
  • You are not a UK tax resident.
I've reached State Pension age do I still Pay?
It is highly likely that you will reach state pension age at some point part of the way through a tax year. If this is the case then you will pay class 4 NI contributions for the whole of the tax year. The good news here is that you won't have to pay any Class 4 NI contributions during the following tax year or during any other future tax year should you continue to work.