National Insurance is the tax nobody thinks about until they see the bill. For employed people, it's deducted automatically. For the self-employed, you calculate and pay it yourself through Self Assessment.

The system is confusing because there are multiple "classes" of NI, each with different rates, thresholds, and purposes. Here's how it works for sole traders and partners.

The Two Types of Self-Employed NI

Class 2 National Insurance

Class 2 is a flat-rate contribution that counts toward your qualifying years for the State Pension and certain benefits.

2025/26 rates:

  • £3.45 per week (£179.40/year) if profits exceed the Small Profits Threshold (£6,725)
  • Voluntary payment available if profits are below the threshold

Class 2 is important because each year you pay it counts as a qualifying year for the State Pension. You need 35 qualifying years for the full new State Pension (currently £221.20/week). Gaps in your record can be filled by making voluntary Class 2 contributions, which is remarkably good value at under £180/year.

Class 4 National Insurance

Class 4 is the main NI contribution for self-employed people. It's calculated as a percentage of your profits and collected through Self Assessment.

2025/26 rates:

  • 6% on profits between £12,570 and £50,270
  • 2% on profits above £50,270

Example calculation:

If you earn £45,000 profit:

  • Class 4 NI: 6% × (£45,000 - £12,570) = 6% × £32,430 = £1,945.80
  • Class 2 NI: £179.40
  • Total NI: £2,125.20

Combined with income tax, your total tax bill on £45,000 profit would be approximately £8,611 (income tax £6,486 + NI £2,125).

How Self-Employed NI Compares to Employment

Here's where it gets interesting. Employed people pay 8% NI on earnings between £12,570 and £50,270 (Class 1). Their employer pays an additional 15% on earnings above £5,000 (reduced threshold from April 2025).

Self-employed people pay 6% on the same band. That's 2 percentage points less than employees, and there's no employer contribution equivalent.

This gap exists because self-employed people don't get statutory sick pay, statutory maternity pay, or Jobseeker's Allowance. You pay less NI, but you get fewer benefits. Whether it's a good deal depends on your perspective.

Protecting Your State Pension

Each tax year where you pay NI (or receive NI credits) counts as a qualifying year for the State Pension. Check your record through the government's "Check your State Pension" tool to see how many qualifying years you have and whether there are gaps.

If you have years with no contributions (perhaps because you earned below the threshold), you can make voluntary Class 2 contributions to fill them. At under £180/year, this is one of the best-value investments available. It buys you 1/35th of the full State Pension, which works out to roughly £6.32/week (£329/year) in pension income for life.

The deadline for filling gaps is generally 6 tax years back, but there are transitional protections for earlier years. Check soon because some deadlines are approaching.

NI for Limited Company Directors

If you operate through a limited company and pay yourself a salary, you pay Class 1 NI (employee rate) and your company pays Class 1 NI (employer rate).

The most common tax-efficient salary level is set at the Secondary Threshold (£5,000 from April 2025, previously £9,100). At this level, no employee or employer NI is due, but you still build up qualifying years for the State Pension as long as the salary exceeds the Lower Earnings Limit (£6,396).

Due to the threshold changes in April 2025, many accountants now recommend a salary at the Lower Earnings Limit of £6,396 to maintain State Pension credits while minimising the employer NI hit.

Common NI Questions

Do I pay NI on rental income? No. NI is only charged on earned income (employment or self-employment). Rental income, investment income, and savings interest are not subject to NI.

Can I opt out of NI? No. It's mandatory if you're working and earning above the thresholds.

Does NI stop at State Pension age? Class 1 and Class 4 NI stop when you reach State Pension age, even if you continue working. Class 2 voluntary contributions can still be made.

What about NI if I have both employment and self-employment? You pay Class 1 on employment and Class 4 on self-employment profits. There's a maximum annual NI contribution to prevent excessive charges if you have significant income from both sources.

FREE

Get Weekly Finance Tips

Join thousands getting clear, honest money advice every week.

Questions? Drop us a note at hello@friedfinance.com. We read every email.