I am an illustrator and earn about £30k in a full time job. I have started doing some self-employed freelance work in my spare time and only expect to earn about £5k of freelance income each year. I understand income tax but national insurance is confusing me – can you explain what national insurance I need to pay.

Answer:

The short answer is that in your situation, based on 15-16 tax year rates, there is no extra national insurance to pay. At £5k of self-employment income you fall below the threshold for paying national insurance and therefore the only national insurance payable is currently being deducted via PAYE via your full time employment.

As a self-employed freelancer typically there are two types of national insurance that are payable. These are called Class 2 and Class 4 National Insurance.

Class 2 National Insurance

In the 2015/16 tax year you must, in normal circumstances, pay Class 2 once your self-employment earnings go above £5,965, this is payable at a rate of £2.80 per week and in the past has been paid by way of a direct debit although some tax payers chose to wait until they received a bill from HMRC and pay it in more of a lump sum. Class 2 payments going forwards are moving from this system and will become part of the self-assessment system and be payable along with Class 4 below.

Class 4 National Insurance

Class 4 National Insurance differs from Class 2 in that it is wholly based upon the profit levels of the self-employed individual. In 2015/16 you pay class 4 at 9% on all profits between £8,060 and £42,385, falling to 2% on profits over £42,385. This amount is calculated via your self-assessment tax return and is normally paid on the 31st January following the end of the tax year in question but may also trigger payments on account.

A couple of examples are outlined below:

ni examples

The above takes into no account of the actually tax charge and is national insurance on self-employed profits only.

Keeping up-to-date with payments of national insurance can prove critical in regards to claiming a state pension and also the ability to claim certain state benefits. If you are unsure about your national insurance position we recommend you seek professional advice.