State Pensions
If you are self-employed, you may have to pay Class 2 National Insurance Contributions and, under certain circumstances, Class 4 NICs as well.
Class 2
You pay the flat-rate Class 2 NICs for every week that you are self-employed. The current rate is £2.30 per week. It is paid by Direct Debit or by quarterly bill.
It is possible to be exempt from paying Class 2 NICs (and therefore exempt from any state pension benefits associated with paying Class 2 NICs) if your net profit is likely to be less than the Small Earnings Exemption (SEE) limit. The SEE limit is currently £4,825 per annum. This exemption is not applied automatically. It must be claimed from HM Revenue & Customs.
Class 4
You pay Class 4 NICs in addition to the Class 2 NICs if your trading profits exceed the lower profit limit. The lower profit limit is currently £5,435 per annum. If eligible, you will pay 8% on your profits between the lower profit limit and the upper profit limit (currently £40,040 per annum). You will also pay an extra 1% on any profits above the upper profit limit. It is paid at the same time as your Income Tax.
Entitlement
Paying Class 2 NICs entitles you to most of the state benefits that employed people paying Class 1 NICs are, i.e. the basic state pension and bereavement benefits. Full details can be found in our state pension section. The main exception is that you will not be entitled to Additional Pension benefits whilst you are self-employed.
Additional Pension
The Additional Pension is paid in addition to the basic state pension. Until April 2002, it was known as SERPS and depended solely on the National Insurance contributions you paid as an employee. From 6 April 2002, SERPS was reformed to provide a more generous additional pension for low and moderate earners, carers and people with a long-term illness or disability. The reformed Additional Pension is known as the State Second Pension (S2P).
The S2P is based upon earnings on which standard rate Class 1 NI contributions are paid or treated as having been paid. It provides a top-up to the basic state pension based on actual or deemed earnings. All employees have to contribute towards additional pension unless they make alternative arrangements by contributing to an occupational or personal pension scheme which is contracted out.
Neither Class 2 nor Class 4 NICs build up an S2P entitlement. Therefore, for the time you are a self-employed person, you will not be accruing an Additional Pension.
Please note that the Government has announced changes to the State Pension. The changes affect the age the State Pension can be claimed, the number of qualifying years required to claim the full Basic State Pension, flexibility for those claiming a pension based on a spouse's record, how Home Responsibilities Protection is calculated and the way pensions are uprated. Click here for information about the changes.
