Following on from my blog post about Payments on Account, another area that is commonly misunderstood by the newly self-employed person is National Insurance.
When starting a business budgeting is important, and as well as the unexpected payments on account that can arise there is also an additional tax due that can increase both the final payment and the payments on account.
When people are employed their National Insurance contributions are automatically deducted through the payroll, and they receive the net amount each month.
I have seen quite a few cases where people have been confused about the two different types of National Insurance that self-employed people pay.
Class 2 NI
This is a fixed weekly amount, currently £2.70 per week, that is collected by invoice directly from HMRC. Some people think that this is the only National Insurance that a self-employed person pays however there is also…
Class 4 NI
This is an additional amount of National Insurance, that is calculated on profits above the lower profits limit (currently £7,755 pa.) This class 4 National Insurance is added to the tax due and collected at the same time. As the current rate is 9%, this can create quite an additional liability that wasn’t expected.
Combined with the start-up costs for a business, having an additional 100% tax due in Payments on Account and an additional 9% tax rate on the profits can have a serious effect.
It’s important to get advice before starting a business, or in the early stages, so that these liabilities can be prepared for.
One additional benefit of getting advice is that any costs of this are an allowable business expense for the self-employed – so the net cost of getting help could turn out to be nearly a third less than you thought.
I also offer a no-charge initial meeting, with a limited number of weekend and evening meetings available each month, so that these points can be covered in order to avoid any unplanned liabilities arising.