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National insurance explained

The NI rules are different for self-employed GP principals and freelancers. Simon Gray has the details.

Your tax return should include details of class 4 NICs owed (Photograph: Alamy)
Your tax return should include details of class 4 NICs owed (Photograph: Alamy)

When you stop being salaried and become a GP principal or a freelance GP such as a locum, for tax purposes, employment ceases and self employment commences. Your national insurance contributions (NICs) also change.

As an employee, you pay class 1 primary (also known as employees') NICs - see below for the 2010/11 rates.

They are collected via the Pay As You Earn system by deductions from your pay. Your employer pays it to HM Revenue & Customs (HMRC).

Quarterly bills
Self-employed people do not pay class 1 NICs but instead pay class 2 and class 4 NICs.

Class 2 is a flat rate contribution (currently £2.40 a week). It is payable every quarter to HMRC or by monthly direct debit. Quarterly bills are issued in arrears. You must pay within 28 days to avoid penalties.

Interest is not usually charged on late payments, but the rate may be raised. You may also lose benefit entitlements. Monthly direct debit payments are taken in arrears.

Class 2 NICs count towards state benefits, such as the basic state pension. Class 4 NICs are paid on annual profits - see the table. They are calculated as part of your annual self-assessment tax return. Payment of class 4 is at the same time as income tax on 31 January and 31 July each year.

Profit shares
Unlike class 2, class 4 does not entitle you to state benefits. In a GP partnership, each partner is responsible for their own class 4 liabilities, which are calculated on their share of the partnership profits.

Class 4 NICs are payable at 8 per cent on profits between £5,715 and £43,875 for 2010/11 plus 1 per cent on profits over that amount.

Often GPs can be both self-employed and employed at the same time, for example, as a partner in a practice in addition to a salaried post, so they are potentially liable for classes 1, 2 and 4 NICs. In such situations, HMRC may grant deferment of contributions.

You may be able to defer class 2 NICs if you expect to pay both class 1 and class 2 contributions in a tax year and your class 1 contributions are likely to be based on earnings which will be equal to or exceed the upper earnings limit for NICs that tax year.

Also, it may be possible to defer your class 4 NICs at the main 8 per cent rate and make contributions at the upper earnings rate of 1 per cent instead, provided you can show that you are likely to pay too much in class 1, 2 and 4 contributions in total.

Once your actual liability has been determined, any shortfall will be collected directly from you. Applications for deferment must be made before the tax year for which you want to defer, so before 6 April 2011 for the 2011/12 tax year. This is an extremely tricky area so get advice from your accountant.

Before the 2010 general election, the Labour government had announced a series of NIC increases which were due to take effect from 6 April 2011 and which would have increased the class 1 employee's rates.

There was speculation that should the Tories win, they would reverse these increases.

Indeed a partial reversal has taken place but nevertheless, from April 2011, the main rate of Class 4 NIC will increase to 9 per cent (from the current 8 per cent) and the 1 per cent rate on profits above the upper limit will increase to 2 per cent.

  • Simon Gray is a partner with specialist medical accountants Henton & Co LLP www.hentons.com
National Insurance Rates
NI Rates 2010/11
Class 1

On earnings between £770 and £844 (upper
earnings limit) per week.
On earnings above £844.

Class 2 £2.40 per week.
Class 4 8%
On self-employed profits between £5,715 and pounds
On excess over £43,875.

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