Freelancers' Questions: Will I pay two lots of National Insurance?

Freelancer’s Question: I might set myself up as self-employed to supply a design project in my local area. I’m leaning towards the sole trader route because the project’s on a deadline and sole trader status seems quicker to arrange than a limited company set-up. But is it true that limited company owners only pay a single class of NI (one payment by them as the ‘employee’ and the second payment by their company as the ‘employer’), whereas sole traders must personally pay 2 separate classes of NI (Class 2 and Class 4)?

Expert’s Answer:  If you are a freelancer then, for tax purposes, you are carrying on a business on your own account so must register with HM Revenue & Customs (HMRC). You must also pay Class 2 National Insurance, which is £2.40 per week for the current 2010/11 tax year. Depending on your sales, you may need to register to pay VAT.

Every tax year you will need to complete a self-assessment return. The tax year runs from 6 April until 5 April. You will need to calculate your taxable profit by taking your sales for the year and deducting allowable expenses. You will also pay tax and Class 4 National Insurance on the profit.

It would be prudent to calculate how much profit you have made on a monthly basis (not forgetting to make a provision for your tax liability); the rest will be available for you to spend on yourself as there is no need to calculate a wage. A professional adviser can help you with any calculations and registrations.

Many people in your position end up working through their own limited company as this can offer many benefits, including in relation to National Insurance. However, doing this can be more complex so professional advice should be sought in advance.

Lastly, as a sole trader, the law says you must keep appropriate records. You would find it difficult to fill in your self-assessment tax return without them. Bank statements, receipts and cash transaction records are all vital for working out your profits for the year and HMRC uses this information to calculate your tax and National Insurance.

The expert was Paul Spindler, partner at chartered accountants Kingston Smith LLP.


5th January 2011

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