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Advanced Taxation (UK) · Income tax: income from self-employment

National Insurance for the Self-Employed in ATX-UK

Updated 11 October 2026 · Fact-checked

Self-employed traders pay Class 4 NIC on their taxable trading profits: 6% on profits between £12,571 and £50,270, and 2% above that. It is paid through self assessment and is not tax deductible. Class 2 is no longer compulsory. Compare this with employer and employee Class 1 when advising on structure.

Understand National Insurance for the Self-Employed

National Insurance is a second tax on earnings. Employees and employers pay Class 1. A sole trader or partner has no employer, so they pay Class 4 on their profits instead.

Class 4 is a profits-based charge. You do not work it out on drawings or cash taken out. You use the taxable trading profit for the tax year, after adjustments, capital allowances and loss relief. Each partner is charged on their own share of profits.

The rates in the tax tables are: nil on the first £12,570, 6% on profits from £12,571 to £50,270, and 2% on profits above £50,270. Class 4 is collected with income tax under self assessment. It is not deductible when you compute income tax.

Class 2 used to be a flat weekly charge. It is no longer a compulsory charge for traders. Paying it voluntarily can protect entitlement to certain state benefits, so it is a planning point, not a cost to build into every computation. The tax tables given to you do not show a Class 2 rate, so do not quote one. Follow the exam requirement.

The structure question is where the marks are. A sole trader pays only Class 4 on profits. A company pays employer Class 1 at 15% on salaries above £5,000 per year, and the director pays employee Class 1 at 8% and 2%. Dividends carry no NIC. This is why NIC often favours a company paying a modest salary and dividends, but you must test it with the figures given.

Key rules to remember

Class 4 main rate
6% × (profits between £12,571 and £50,270)
The band is £37,700 wide. Maximum charge at the main rate is £2,262.
Class 4 additional rate
2% × (profits above £50,270)
Applies to the slice only, not to all profits.
Class 4 lower limit
Nil on the first £12,570 of profits
If profits are £12,570 or less, there is no Class 4.
Class 1 employee
8% × (earnings £12,571 to £50,270) + 2% × (earnings above £50,270)
Use when comparing with a company director's salary.
Class 1 employer
15% × (earnings above £5,000 per year)
Extra cost to the company, on top of gross salary. It is a deductible expense for the company.
Employment allowance
Up to £10,500 off employer Class 1
Only if the employer qualifies. Check the facts before applying it.
Class 1A
15% × taxable benefits provided to employees
Employer only. Relevant when a company provides benefits in kind.

How to solve National Insurance for the Self-Employed questions

Use this method for a Class 4 computation or a structure comparison.

  1. 1Identify the person and the tax year. Is it a sole trader, a partner (use their own profit share) or a director of a company?
  2. 2Find the taxable trading profit for the year after adjustments, capital allowances and any loss relief.
  3. 3Apply Class 4: nil to £12,570, 6% to £50,270, 2% above. Show each band separately.
  4. 4Do not deduct Class 4 from profits when computing income tax. State this in your answer if tax is also required.
  5. 5For a company alternative, compute employer Class 1 at 15% above £5,000, and employee Class 1 at 8% and 2%. Apply employment allowance only if the facts allow it.
  6. 6Remember dividends and Class 4 profits have different NIC treatment: dividends have none.
  7. 7Compare the total NIC, then the total tax cost and after-tax cash. State your assumptions and give a recommendation.
  8. 8Mention non-tax points where asked, such as benefit entitlement, risk and administration.

Quickest way: Band-slice shortcut for Class 4

When to use it: Use when you only need the Class 4 figure and profits are above £50,270.

  1. Compute 6% × £37,700 = £2,262 as the fixed main rate amount.
  2. Take profits less £50,270 and multiply by 2%.
  3. Add the two figures.
  4. If profits are between £12,570 and £50,270, use 6% × (profits − £12,570).
  5. If profits are £12,570 or below, the answer is nil.

Common mistakes in National Insurance for the Self-Employed

  • Charging Class 4 on drawings or on profits before adjustments.

    Students use the accounting profit given in the scenario.

    Fix: Always start with the taxable trading profit after adjustments, capital allowances and loss relief.

  • Applying 6% to the whole profit once profits exceed £50,270.

    Confusing banded NIC with a flat rate.

    Fix: Split into slices: 6% on £37,700, then 2% on the excess.

  • Deducting Class 4 as a business expense.

    It feels like a cost of trading.

    Fix: Class 4 is never deductible for income tax. Employer Class 1 is deductible for a company.

  • Quoting a Class 2 rate or treating Class 2 as compulsory.

    Old study notes still show a weekly charge.

    Fix: Say Class 2 is no longer compulsory and can be paid voluntarily to protect benefits. Do not invent a rate.

  • Forgetting employer Class 1 when comparing a company with a sole trader.

    Students only compute the employee's NIC.

    Fix: Include employer NIC at 15% above £5,000 and note the employment allowance only if it is available.

  • Ignoring NIC on dividends in the comparison without saying why.

    Students forget it is a key advantage of dividends.

    Fix: State that dividends carry no NIC, but are not deductible for corporation tax and bear dividend income tax.

Worked examples

Example 1

Maya is a sole trader. Her taxable trading profit for the tax year is £60,000. Compute her Class 4 NIC.

Show the solution
  1. Profits up to £12,570 are charged at nil.
  2. Main rate band: £50,270 − £12,570 = £37,700. At 6% this is £2,262.
  3. Excess above £50,270: £60,000 − £50,270 = £9,730. At 2% this is £194.60.
  4. Total: £2,262 + £194.60 = £2,456.60.

Answer: Class 4 NIC is £2,456.60. It is not deductible in computing her income tax.

Example 2

Tom can earn £30,000 of profit as a sole trader, or have his company pay him a £30,000 salary. Compare only the NIC cost. Ignore employment allowance and assume the salary is the only payment to employees.

Show the solution
  1. Sole trader: Class 4 = 6% × (£30,000 − £12,570) = 6% × £17,430 = £1,045.80.
  2. Company: employer Class 1 = 15% × (£30,000 − £5,000) = 15% × £25,000 = £3,750.
  3. Company: employee Class 1 = 8% × (£30,000 − £12,570) = 8% × £17,430 = £1,394.40.
  4. Total company NIC = £3,750 + £1,394.40 = £5,144.40.
  5. Difference = £5,144.40 − £1,045.80 = £4,098.60.

Answer: The sole trader route costs £1,045.80 of NIC. The salary route costs £5,144.40, which is £4,098.60 more. Employment allowance, if available, would reduce the employer figure, and the comparison should be extended to income tax, corporation tax and dividends.

Exam tips

  • Show each NIC band as its own line. Marks are for method even if the arithmetic slips.
  • Use the figures from the tax tables. Do not rely on memory for rates, and do not quote a Class 2 rate.
  • In a structure question, compare total tax plus NIC, not NIC alone, and state that dividends carry no NIC.
  • Write one sentence on Class 2 and benefit entitlement if the scenario mentions state benefits or low profits.
  • Professional skills marks reward a clear recommendation with stated assumptions, so finish with advice.

Practice questions from Income tax: income from self-employment

National Insurance for the Self-Employed in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

National Insurance for the Self-Employed: frequently asked questions

How are Class 4 NICs calculated on trading profits?

Take the taxable trading profit for the year. Charge nil on the first £12,570, 6% on profits from £12,571 to £50,270, and 2% on anything above. Add the slices together.

What is the difference between Class 2 and Class 4 NIC?

Class 4 is a compulsory charge on profits above the lower limit and is collected with income tax. Class 2 is no longer compulsory for traders and can be paid voluntarily to protect certain benefit entitlement.

Is Class 4 NIC deductible against profits?

No. It is not a deductible expense when you compute income tax. Employer Class 1 paid by a company is deductible for corporation tax.

How does employer Class 1 compare with self-employed NIC?

Employer Class 1 is 15% on salaries above £5,000 per year, on top of employee NIC. A sole trader pays only Class 4, which is at much lower rates. Dividends from a company carry no NIC.