Recent changes in National Insurance Contributions (NICs) have significant implications for self-employed individuals.

Any self-employed person must understand what their NICs will look like when new regulations come into force.

Let us look into the changes to National Insurance regulations and how they will impact those who are self-employed, and how to mitigate any challenges presented by new rules.

What’s changed?

One of the most significant recent changes to the tax system for self-employment is the abolition of Class 2 National Insurance.

Until 6 April 2024, the rate of Class 2 NICs is a flat rate of £3.45 per week for individuals earning above the threshold of £12,570.

The abolition of this payment serves to simplify the tax requirements for the self-employed without compromising individual access to contributory benefits such as the State Pension.

The Government estimates that the average self-employed person will save £350 per year on Class 2 NICs.

In addition to Class 2, self-employed individuals are required to pay Class 4 National Insurance based on profits.

For those earning between £12,570 and £50,270, the rate will remain at nine per cent until 6 April 2024. After that point, the rate will be reduced to 8 per cent.

For earners above the £50,270 threshold, Class 4 NIC rate will remain at two per cent.

The reduction in these contributions can result in lower immediate tax liability, providing some relief and potentially altering your tax planning strategies.

Tax planning essentials for the self-employed

With lower NI liabilities, self-employed individuals can enjoy significant benefits from tax planning and examining their existing business structure.

The relief may offer breathing room for sole traders to take a step back and review their business.

These are the major considerations that you need to account for if you’re self-employed and want to become more tax-efficient:

• Keep accurate records: Maintain meticulous records of all income and expenses. This not only ensures that you are paying the correct amount of tax but can also help you identify deductible expenses to reduce your tax liability.
• Utilise allowable expenses: Understand what expenses are allowable for tax purposes. These can include costs directly related to your business, such as travel, office costs, and certain types of equipment.
• Capital allowances: If you buy equipment for your business, you might be able to claim capital allowances. This allows you to deduct some or all of the value of the item from your profits before you pay tax.
• Consider VAT registration: If your turnover is above the VAT threshold, you must register for VAT. However, even if your turnover is below the threshold, voluntary registration can sometimes be beneficial, allowing you to reclaim VAT on business expenses.
• Pension contributions: Contributions to a pension scheme can be a tax-efficient way of saving for retirement, as these contributions can reduce your overall taxable income.

Managing tax liabilities

Proper tax planning involves not just reducing your current tax bill but also managing your future tax liabilities.

Consider the long-term implications of your tax decisions, such as how saving in a pension now might affect your income tax in retirement.

Effective tax planning for self-employed individuals in the UK requires a comprehensive understanding of current tax laws, including recent changes like the abolition of Class 2 NICs and reduction in Class 4 contributions.

For further information, you should seek professional support to discuss how you can become more tax-efficient during self-employment.

Please contact us for practical support and guidance on National Insurance and other tax planning.