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Class 2 is a flat weekly contribution rate paid every week or part week you are self-employed. This includes holiday periods, and is regardless of how much you earn.

The current weekly rate is £2.40.

Class 2 National Insurance contributions give entitlement to a range of contributory benefits:

• Incapacity Benefit
• Maternity Allowance
• Basic State Pension
• Bereavement Benefits
• Widowed Parent's Allowance
• Bereavement Allowance
• Bereavement Payment

You must pay Class 2 contributions if you are self-employed and

• Age 16 or over but below State Retirement Pension age
• Have not been excepted from liability to pay.
• Meet residence and presence conditions – you are normally resident in the UK or resided in the UK for at least 26 of the 52 weeks previously

You pay by monthly Direct Debit to HM Revenue & Customs, National Insurance contributions Office. When you register as Self Employed with HMRC, you should also complete a Direct Debit form CA5601 and return this to HMRC.

If you delay payment of your Class 2 contributions for more than one year from the end of the tax year in which the contributions are due you may have to pay at a higher rate and any late payments may effect your entitlement to benefit.

A self-employed person can be exempt from Class 2 NI if net profits are expected to be less than the Small Earnings Exception (SEE) limit. This is currently £5075.

SEE is normally awarded for three years at a time unless a shorter period is warranted, or where you are newly self employed. Exemption is granted on application using form CF10 which must be sent to :

HM Revenue & Customs
National Insurance Contributions Office
Self Employment Services
Benton Park View
Newcastle upon Tyne
NE98 1ZZ

You can also be exempted from Class 2 contributions for any week you are:

• In receipt of Sickness Benefit, Invalidity Benefit or Incapacity Benefit for the whole week
• Incapable of work for the whole week
• Undergoing imprisonment or detention in legal custody for the whole week
• A Volunteer Development Worker for the whole week
• In receipt of Maternity Allowance
• In receipt of Invalid Care Allowance.

If you are a married woman or widow and have opted to pay a reduced amount of NI contributions you do not have to pay Class 2 NI. You will have to pay Class 4 contributions if your profits are high.

If you have substantial Class 1 National Insurance liability in addition to your self employed liabilities, you can apply for a deferment of your Class 2 and Class 4 liabilities.

This will avoid paying contributions in excess of the maximum amount payable and thereby removes the need for you to apply for a refund.

If you are just starting up in business and want help in understanding any of this information, contact the HMRC Business Support Teams on 08459 154515.

It is basically the National Insurance paid on profits made by the self employed. The contributions do not count towards any state benefits.

Class 4 contributions are only payable if:

• a self-employed person has trading profits chargeable to income tax under Cases 1 & 11 of Schedule D (subsequently Self Assessment cases), and
• those profits exceed the lower (profit) limit, and
• exception does not apply

Class 4 National Insurance contributions are paid in addition to the flat rate of Class 2 National Insurance contributions. These contributions are profit related, so unlike Class 2 not all self-employed people will have to pay them.

Class 4 National Insurance contributions are also payable by employed people who are treated as self employed for National Insurance contributions purposes.

You are automatically exempted from paying Class 4 contributions if you:

• have reached or are over state pension age at the beginning of the tax year of assessment
• are treated for income tax purposes as not resident in the UK
• are a trustee, executor or administrator (but only in some cases)
• are a sleeping partner (supplies capital and takes a share of profits but takes no active part in running trade)
• are a diver or diving supervisor (exemption only applies to certain divers/supervisors).

The Class 4 National Insurance contributions you need to pay for any tax year are based on your taxable profits for that year, which you will show on your annual Self-Assessment tax return. Class 4 is calculated as 8% of your net profit above the threshold, current £5,715 (2009/10)

If you have substantial Class 1 liability (income from PAYE), in addition to self-employed liabilities, you can apply for a deferment of your Class 2 and Class 4 liabilities. This will avoid paying contributions in excess of the maximum amount payable and thereby removes the need for you to apply for a refund.

If you are just starting up in business and want help in understanding any of this information, contact the HMRC Business Support Teams on 08459 154515.