Whether you pay income tax or National Insurance, the effect on your cash flow is the same. The payments are a necessary part of our obligation to fund the activities of State, but the self-employed are often surprised that their bi-annual tax payments cover both “taxes” – NIC and income tax.
The weekly NIC Class 2 contribution is included, presently £2.95 per week, also Class 4 contributions: these amount to 9{11092aa1eab99d85b02efc0ee3c04dc4f5b81bebfc2bd8f608402c1b0eb15b7e} of taxable income in excess of £8,424 and up to £46,350, and 2{11092aa1eab99d85b02efc0ee3c04dc4f5b81bebfc2bd8f608402c1b0eb15b7e} on earnings above £46,350.
Accordingly, the combined rate of State dues on self-employed earnings in excess of £8,424 is potentially 29{11092aa1eab99d85b02efc0ee3c04dc4f5b81bebfc2bd8f608402c1b0eb15b7e} – 20{11092aa1eab99d85b02efc0ee3c04dc4f5b81bebfc2bd8f608402c1b0eb15b7e} basic income plus 9{11092aa1eab99d85b02efc0ee3c04dc4f5b81bebfc2bd8f608402c1b0eb15b7e} Class 4 NIC – and over £46,350 a combined rate of 42{11092aa1eab99d85b02efc0ee3c04dc4f5b81bebfc2bd8f608402c1b0eb15b7e}. Although in practice some of the income over £8,424 may be covered by other personal tax allowances, these combined rates illustrate the true impact of income tax and National Insurance to be paid.
Self-employed traders with significant taxable earnings should therefore expect to pay more than the usual rates of income tax when they contemplate settlement of their annual self-assessment bill and have funds in reserve to meet these combined liabilities.