Nic payable by the self employed from april 2024

From April 2024, significant changes have been introduced to how National Insurance Contributions (NICs) are calculated for the self-employed in the UK. If you’re running your own business, these changes could affect your tax bill substantially. In this post, we’ll break down what’s changed, who it affects, and what steps you should take to stay on top of your obligations.

What Changed in April 2024?

The key change centres on Class 2 and Class 4 National Insurance for self-employed individuals. From 6 April 2024, the Class 2 flat-rate contribution was abolished entirely. This is a significant shift from the previous system where self-employed people paid a fixed amount alongside their Class 4 contributions based on profits.

Previously, Class 2 NICs cost £163.80 per tax year (2023/24). This has now been removed, which might sound like good news—and for many sole traders, it is. However, the Class 4 rate has increased to compensate. The main rate of Class 4 NIC rose from 9% to 10.25% on profits between the threshold and upper threshold.

Additionally, a new allowance has been introduced. You’ll now benefit from a £12,570 trading allowance, which means your first £12,570 of self-employment income is effectively disregarded for Class 4 NIC purposes. This is similar to the personal allowance concept but applies specifically to National Insurance calculations.

Who’s Affected?

Virtually all self-employed individuals filing a Self Assessment tax return are affected by this change. Whether you’re a sole trader, freelancer, consultant, or partnership member, you’ll need to understand how these new rates apply to your circumstances.

However, the impact isn’t uniform across all earners. Those with lower profits may actually benefit from the abolition of the Class 2 flat rate, particularly if they earn below £11,908 (the previous Lower Profits Limit). For higher earners, the increase in Class 4 rates will likely result in a higher overall NIC bill.

It’s worth noting that employees aren’t affected by these changes. Class 1 NICs for employees remain unchanged. These modifications apply solely to the self-employed and business partners.

Calculating Your New Class 4 Liability

The calculation of Class 4 NICs under the new rules is straightforward, though it requires careful attention to the thresholds.

Class 4 is calculated on profits between £11,908 and £50,270 at the main rate of 10.25%. Above £50,270, the rate drops to 3.25%. The £12,570 allowance mentioned earlier is offset against your profits before these calculations apply.

For example, if you’re a sole trader with £40,000 of trading profits, you’d calculate Class 4 as follows:

Profits: £40,000 Less: trading allowance: £12,570 Taxable profit for Class 4: £27,430

You’d then pay 10.25% on this amount, equalling £2,811.58.

You won’t pay Class 2 NICs on top of this, which is a key difference from previous years. The abolition of this flat-rate contribution simplifies the calculation, even though higher earners face increased Class 4 rates overall.

Planning Considerations

Given these changes, it’s worth reviewing your business structure and income planning strategies. Some self-employed individuals might benefit from exploring incorporation or other business arrangements, though this isn’t a one-size-fits-all solution—you’ll need to consider Corporation Tax, dividend allowances, and other factors.

Additionally, keeping meticulous records of your trading income and allowable expenses remains essential. The more accurately you can justify your expenses, the lower your profit figure and, consequently, your NIC liability.

For those expecting significant income growth, it might be worth discussing the implications of approaching or exceeding the upper threshold of £50,270, where the NIC rate drops considerably.

Final Thoughts

The April 2024 NIC changes represent a meaningful shift in how self-employed individuals contribute to the National Insurance system. Whilst the removal of Class 2 provides some administrative simplification, the increased Class 4 rate means many self-employed earners will see their total NIC bill rise.

Understanding these changes and planning accordingly is crucial. Whether you’re a newly self-employed person or an established business owner, reviewing your tax position in light of these changes is sensible.

For tailored advice, contact Severn Accounting — we’re here to help.