In addition to income tax, the self employed may be liable to pay, and employees may suffer deduction of, national insurance contributions (NIC). For employees these are payable where earnings exceed a weekly earnings threshold.
Earnings at or below the threshold do not attract a contribution liability, and contributions above the threshold are charged up to an upper limit, with a further (but lower) charge applying to all earnings above the upper limit. Prior to 6 April 2016, if the employee was contracted out of the state earnings-related pension scheme a reduced rate was applicable on earnings below the upper earnings limit.
Employers also pay national insurance contributions on the earnings of their employees, above the earnings threshold. Prior to April 2016 there was a lower employers' rate where the employee was contracted out. From April 2014 there has been an allowance of £2,000 per year for all businesses and charities to be offset against their employer’s NICs bill. The allowance is claimed as part of the normal payroll process through real time information (RTI).
George Osborne, the chancellor, said in his UK Budget 2015 announcement, that he would scrap class 2 national insurance contributions in the next parliament — a charge of £2.75 a week for self-employed workers whose profits are more than £5,885 a year.
The move will save self-employed people £143 a year. Higher earners will still have to pay class 4 national insurance contributions, which are levied at 9 per cent of profits between £7,956 and £41,865 and 2 per cent on profits over £41,865.
The chancellor’s decision reflects the growing economic significance of the self-employed, whose ranks have swelled in the years since the crisis to 4.5m, or about 15 per cent of the workforce.