Whether you pay Income Tax or National Insurance, the effect on your cash flow is the same. The payments are a necessary part of our obligation to fund the activities of State, but the self-employed are often surprised that their bi-annual tax payments cover Income Tax and National Insurance.
The weekly Class 2 contribution is included, presently £2.85 per week, and also Class 4 contributions: these amount to 9% of taxable income in excess of £8,164 and up to £45,000, and 2% on earnings above £45,000.
Accordingly, the combined rate of State dues on self-employed earnings in excess of £8,164 is potentially 29% – 20% basic income plus 9% Class 4 NIC – and over £45,000 a combined rate of 42%. Although in practice some of the income over £8,164 may be covered by other personal tax allowances, these combined rates illustrate the true impact of Income Tax and National Insurance to be paid.
The lower Class 2 contribution is due to be withdrawn from April 2018.
In his first stab at a budget in March this year, Philip Hammond wanted to increase the Class 4 NIC rates from 9% to 10% (April 2018) and from 10% to 11% (April 2019). These increases were subsequently withdrawn. Whether the new, minority government will seek to re-introduce these changes remains to be seen.
Self-employed traders with significant taxable earnings should therefore expect to pay more than the usual rates of Income Tax when they contemplate settlement of their annual Self Assessment bill, and have funds in reserve to meet these combined liabilities.
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