National Insurance contributions are often one of the most confusing aspects of being self-employed. Unlike employed people who pay Class 1 NI via PAYE, sole traders pay a different type — here’s how it works.
Class 2 National Insurance
Class 2 NI is a flat weekly contribution (£3.45 per week for 2026/27) paid by self-employed people with profits above the Small Profits Threshold (£6,845 for 2026/27). It’s paid via your self assessment tax return and counts towards your State Pension entitlement.
💡 Key takeaway
Sole traders pay Income Tax and Class 4 NI on profits above the personal allowance — every £ of business expense you miss adds to that bill.
Class 4 National Insurance
Class 4 NI is a percentage of your profits paid alongside income tax via self assessment. The rate for 2026/27 is 9% on profits between £12,570 and £50,270 and 2% on profits above £50,270.
🧑 Sole Trader
- Simple self assessment return
- Income Tax + Class 4 NI on profits
- Personal allowance applies
- No corporation tax
- Losses offset against other income
🏢 Limited Company
- Corporation tax on profits (19–25%)
- Salary + dividends structure
- More complex filing
- Separate tax returns for directors
- Often more tax-efficient above £50k profit
National Insurance and State Pension
Paying Class 2 and Class 4 NI builds your qualifying years for State Pension. You need 35 qualifying years for the full new State Pension (currently £221.20/week for 2026/27). If your profits are below the Small Profits Threshold, you can still pay voluntary Class 2 to protect your State Pension.
Partnership NI
Partners in a partnership pay the same Class 2 and Class 4 NI as sole traders, based on their share of partnership profits.
Employed and Self-Employed
If you’re both employed and self-employed simultaneously, you pay Class 1 NI on your employment income and Class 2/4 on your self-employment profits. However, there are maximum NI limits — you won’t pay more than a certain amount in total.
Frequently Asked Questions
Do I pay National Insurance as a sole trader?
Yes — Class 2 NI (flat rate) and Class 4 NI (percentage of profits) are paid via your self assessment tax return if your profits exceed the relevant thresholds.
How does NI affect my State Pension?
Paying Class 2 NI builds qualifying years for your State Pension. You need 35 qualifying years for the full pension.
Do limited company directors pay NI?
Directors pay Class 1 NI on salary via PAYE. No NI is paid on dividends — a key tax advantage of the limited company structure.
