Voluntarily paying tax when you don’t have to goes against the grain. But if you’re self-employed you may have been presented with the option on your tax return to pay Class 2 national insurance even though your taxable profits are below the tax-free threshold.
If you’re wondering what to do, then keep reading. In this guide, we’ll look at the circumstances where an individual may decide to pay class 2 NICs voluntarily and what resources are available to help you make a decision on what best to do.
Friendly Disclaimer: Whilst I am an accountant, I’m not your accountant. The information in this article is legally correct but it is for guidance and information purposes only. Everyone’s situation is different and unique so you’ll need to use your own best judgement when applying the advice that I give to your situation. If you are unsure or have a question be sure to contact a qualified professional because mistakes can result in penalties.
How Much is Class 2 National Insurance?
Class 2 National Insurance is automatically charged at £3.45 per week when a sole trader’s taxable business profits exceed £6,725 during the tax year**. But when you fill in your tax return you are presented with the option to pay it voluntarily if your business profits are below £6,725.
Class 2 NICs is one of three taxes sole traders pay:
- Income Tax
- Class 2 National Insurance
- Class 4 National Insurance
** the tax year runs from 6 April to 5 April
Here’s an example:
Penny’s taxable business profits for the tax year 2023-24 are £4,000, below the threshold for Class 2 NICs. When she fills in her tax return she is asked whether she would like to pay class 2 national insurance voluntarily.
If she chooses yes, an additional amount of £179.40 (£3.45 x 52 weeks) will be included in her tax calculation for 2023-24.
What’s the Difference Between Class 2 and Class 4 National Insurance?
Class 2 national insurance protects your ability to claim certain state benefits when you’re self-employed as long as you’ve made sufficient contributions. Class 4 national insurance is really just a type of tax on profits, in addition to income tax.
Should You Pay Class 2 NICs Voluntarily?
Class 2 National Insurance is paid by the self-employed to protect their ability to claim certain state benefits such as:
- Basic state pension;
- New state pension;
- Contribution-based employment and support allowance
- Universal credit;
- Maternity allowance;
- Bereavement Support Payment.
If you haven’t made sufficient class 2 contributions you may find you can’t claim these benefits or they are restricted because your national insurance record has gaps.
What is a National Insurance Gap?
A gap on your national insurance record is a tax year where you fail to pay the appropriate type of national insurance. Having a gap can mean you put yourself at risk of how much state benefit you can claim, if at all.
New State Pension
Under the New State Pension Rules, you can only claim the full state pension if you have made 35 qualifying years of National Insurance contributions. Your contributions can be made from Class 1 (on a payslip) or Class 2 National Insurance contributions. If you have less than 35 qualifying years, when it comes to claiming your state pension, then the full amount will be pro-rated.
You must have at least 10 qualifying years on your National Insurance record to make a claim at all.
Log into your Personal Tax Account to check your National Insurance Record.
Maternity Allowance
Maternity allowance is a state benefit paid to mums-to-be who cannot claim statutory maternity pay which is normally given to employees because they are registered as self-employed.
To claim the full amount of Maternity Allowance you must have paid Class 2 National Insurance for at least 13 of the 66 weeks before your baby is due. If you have not paid enough Class 2 NICs to get the full amount, you’ll get £30 for 39 weeks.
Read this guide to maternity allowance for the self-employed to find out how much you can claim and how to claim it.
How to Pay Pay Class 2 NICs Voluntarily
When you fill out your self-assessment tax return, you can choose to pay class 2 NIC as part of finalising the self-employment section of your return. Once you have entered the details about your self-employment earnings you’ll be presented with this screen, where you can choose whether to pay NICs voluntarily:
NICs When You’re Employed and Self-Employed
When you are employed, your employer will be deducting Class 1 National Insurance from your salary if you meet the thresholds for paying it. But Class 1 NICs are a contribution towards your ability to claim state benefits, similar to Class 2 NICs
| Benefit | Class 1 | Class 2 |
|---|---|---|
| Basic State Pension | Yes | Yes |
| Additional State Pension | Yes | No |
| New State Pension | Yes | Yes |
| Contribution-based Jobseeker’s Allowance | Yes | No |
| Contribution-based Employment and Support Allowance | Yes | Yes |
| Maternity Allowance | Yes | Yes |
| Bereavement Support Payment | Yes | Yes |
So the question is if you are employed and self-employed are you paying twice towards the same benefits? Should bother with voluntary Class 2 NICs?
Generally speaking, you do need to pay both Class 1 and Class 2 National Insurance.
But each tax year, there is a maximum amount of National Insurance every individual needs to pay to protect their entitlement to state benefits called the Annual Maximum.
The Annual Maximum for National Insurance
In an attempt to ensure that anyone who is employed and self-employed do not end up paying more national insurance than someone who is employed.
It means you could claim for a refund of Class 4 National Insurance and Class 2 National Insurance.
Read more about the Annual Maximum
Wrapping Up
Paying Class 2 NICs voluntarily may feel like an extra cost but chances are your future self will thank you.
If you don’t pay into the ‘pot’ you can’t expect to receive money back out from it.
Start by reviewing your national insurance record in your personal tax account to check for any NIC gaps.
Then consider whether you need to top up your NICs. Unless you really do not have the cash or are receiving benefits that give you national insurance credits such as Working Tax Credit.
