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Sole Trader - National Insurance Question

(36 Posts)
WillWorkForFood Tue 01-Jan-19 17:23:06

I have set up as a sole trader and whilst I managed to research and find out most of what I need to know, I'm struggling with National Insurance, from a state pension credits perspective

I'm aware that earnings need to be at least £112 per week to qualify for state pension credits and that NI has t be paid by 31st Jan the following year etc, but I can't find any information confirming how the pension credits are calculated when NI is paid in a lump sum like that.

For example, do they divide the total NI paid across the previous year in question and ascertain that an average of more than £112 per week was earned and retrospectively apply the state pension credits to the full 12 month period?

Or do they need a full week by week report on what was earned and then only pay credits for weeks that were over the threshold, even if the total was over the £112 p/w as an average?

I could do with some definite answers if anyone has any on how credits are earned, applied and measured when NI is paid annually.

My ultimate objective is to ensure that I don't miss out on state pension credits and that I report correctly to facilitate this, without having to resort to the far more expensive voluntary contributions.

Thanks in advance.

Badbadbunny Tue 01-Jan-19 19:12:06

NIC is based on annual business profits, but you can voluntarily pay it if profits are too low, so either way, you can pay it via your self assessment tax return - as long as it's paid by 31 Jan you get your years' worth of NIC credits towards state benefits.

WillWorkForFood Thu 03-Jan-19 19:47:44

Thank you, appreciate the reply. So it's based on total annual total amounts, not weekly or monthly?

GeorgieTheGorgeousGoat Thu 03-Jan-19 19:49:19

Have you done you tax return yet? It’s quite clear on there.

Ta1kinPeace Thu 03-Jan-19 19:50:49

NI for self employed is all about annual now, not week by week

WillWorkForFood Fri 04-Jan-19 07:39:53

Thanks all.
No, I've not done a tax return yet as I've only just set up.
Sounds like as long as I earn (and therefore pay) above the annual threshold, all pension credits will be applied.
Great stuff.

Kazzyhoward Fri 04-Jan-19 10:13:24

Sounds like as long as I earn (and therefore pay) above the annual threshold, all pension credits will be applied.

It's paying class 2 NIC that matters, not earnings. If you breach the threshold, you have to pay the NIC, but if your earnings are beneath, you can still opt to pay class 2 NIC voluntarily by simply ticking a box on your tax return, and will therefore get your NIC credits towards state benefits.

Ta1kinPeace Fri 04-Jan-19 11:56:52

But Class 2 is abolished this April
after that voluntary will need to be class 3 which is more expensive

Kazzyhoward Fri 04-Jan-19 12:25:05

But Class 2 is abolished this April

No it isn't. The abolition has been scrapped. Class 2 NICs are here to stay at least for the rest of this Parliament.

www.accountingweb.co.uk/tax/hmrc-policy/budget-2018-small-changes-for-national-insurance

"Flip-Flop" Treasury/HMRC have finally accepted what the accountancy profession has been telling them about the negative consequences of scrapping them without them having a viable alternative.

Ta1kinPeace Fri 04-Jan-19 12:31:56

Sorry, my bad. Brain not working.
Yup its been announced so many times I forgot where we were up to

at least MTD for SA has been delayed (hasn't it)

Badbadbunny Fri 04-Jan-19 15:37:01

at least MTD for SA has been delayed (hasn't it)

Yes, indeed, kicked into the long grass where it belongs. Let's hope they forget it. The VAT MTD is so watered down now it's virtually pointless and I suspect MTD for SA will end up the same.

Ta1kinPeace Fri 04-Jan-19 16:20:23

I was looking at the data details VAT MTD and I really cannot see the point
I just wish they would sort out CIS !

I have tax clients who still work on the "scrape bundles of receipts off the van dashboard"
nothing will change them

WillWorkForFood Sat 05-Jan-19 12:57:50

Please forgive me if I sound a bit thick, but I'm just trying to get the basic numbers straight in my head.

Am I correct in believing that if at the end of the year my annual business earnings are at least £6,365 then I have to pay £3 per week Class 2 NIC.
If I then exceed £8,632 I also have to pay class 4 at 9% of anything over this amount in addition to the class 2?

Is this based on income or profits after expenses?

Finally, and the most important to me at the moment.... if I earn at least the annual equivalent of £116 per week (Lower earning limit LEL), i.e £6,032 annually, I will receive credits towards state pension?

Ta1kinPeace Sat 05-Jan-19 13:31:43

If you pay class 2 you count towards a pension
Class 4 is effectively just extra 9% tax
the LEL is for employment / Class 1 ; not relevant to self employment

WillWorkForFood Sat 05-Jan-19 17:47:36

Thanks, so in order to ensure I don't miss out on pensions credits, I need to earn at least £6,365?

Is this profit or earnings?

If I'm short, do I not receive any credits, or would I still earn some? How is this calculated and how much would I need to pay in voluntary contributions to make up any difference, if for example I earned £5,000 in income? as I know class 3 is £15 per week. How would that be calculated - i.e how many weeks?

Thanks.

Ta1kinPeace Sat 05-Jan-19 17:49:02

Its taxable profit that is assessed for pensions
but TBH unless you are over 45, I suspect the state pension will be worth about 50p by the time you get it
so focus on your business for now

Badbadbunny Sat 05-Jan-19 19:06:15

If your profits are too low to pay class 2 NIC, you can still tick the box on the tax return to pay class 2 voluntarily to count towards state benefits.

WillWorkForFood Sat 05-Jan-19 19:54:37

@Ta1kinPeace - I am over 45 and don't have a personal pension so it's essential I max out my state pension in addition to other securities.

@Badbadbunny - Thanks, so if I'd earned £5,000 in profit after expenses, how many lots of £15 per week class 3 would I need to pay to ensure full pension credits?

Badbadbunny Sat 05-Jan-19 20:00:56

Thanks, so if I'd earned £5,000 in profit after expenses, how many lots of £15 per week class 3 would I need to pay to ensure full pension credits?

It's annual - you pay for a full year's of voluntary contributions (pro rata to fewer weeks if your business started during the tax year, so if it started half way through, you'd only pay 26 weeks worth).

WillWorkForFood Sat 05-Jan-19 21:52:03

I'm embarrassed for not quite getting this... please forgive me...

So If my business has been running all year, and I earn £100 less than the threshold to qualify for pension credits, I have to pay a full year of class 3 at £15 per week = £780??

Doesn't seem right/fair?

Ta1kinPeace Sat 05-Jan-19 21:54:00

Self employment is per year
that is the way it goes
and TBH if your business is only making you £7000 a year, pensions are almost the least of your worries

GeorgieTheGorgeousGoat Sat 05-Jan-19 22:07:58

Why wouldn’t you just voluntarily pay class 2 though? I think you’re making this much harder than it needs to be!

GeorgieTheGorgeousGoat Sat 05-Jan-19 22:08:59

And Ta1kinpeace, lots of businesses don’t! I made a loss in my first year!

Ta1kinPeace Sat 05-Jan-19 22:17:49

^Georgie*
I know. Lots of my clients make losses.
But they stress more about the business than on £80 pounds a week of pension in 25 years time grin

WillWorkForFood Sat 05-Jan-19 22:56:52

@George.

If I earn £1 over the £6,365 threshold, I pay 52 x £3 pw = £156 in Class 2 but attract pension credits?

If I earn £1 under the £6,365 threshold, I don't pay any NIC, but also miss out on pension credits, unless I pay 22 x £15 p/w = £780.

i.e I'm disadvantaged paying Class 3 under those circumstances?

Correct?

I know this is contextually unusual, but I want to make sure I understand the theory, calculations and structure.

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