NI & Self-Employment

Xero Queen
Jul 8
3 min read

Avoiding the Trading Allowance Trap: Protect Your National Insurance Record

If you became self-employed in late 2024 and are now preparing your 2024/25 tax return, you might be considering claiming the trading allowance to simplify your tax reporting.

While this can reduce your taxable income, it could also unintentionally affect your National Insurance (NI) record—and ultimately your state pension entitlement. Let’s break down how this works and what you should watch out for.

Understanding NI for the Self-Employed

When you’re self-employed, you’re responsible for managing both your income tax and National Insurance contributions. While many focus on income tax, NI is just as important—especially for building up your qualifying years for the state pension.

From April 2024, Class 2 NI was abolished, but it still plays a role in your pension record through voluntary contributions.

The Role of the Small Profits Threshold (SPT)

For 2024/25, the Small Profits Threshold (SPT) is £6,725. Here's how if affects your NI status:

Profits above the SPT - You're treated as having paid Class 2 NI - even if you don't actually pay anything. This gives you a qualifying year for your state pension.

Profits below the SPT - You won't automatically get NI credits unless you qualify through other means for example you are in receipt of child benefit. To protect your pension you will need to pay voluntary Class 2 NI, currently £36.50 per week or £182.00 for the year

How the Trading Allowance Can Trip You Up

The trading allowance lets you deduct up to £1,000 from your income instead of claiming actual business expenses. It’s useful if your expenses are low—but it can reduce your taxable profit below the SPT, costing you a qualifying NI year.

Example:

Emma is a self-employed tutor with:

Turnover: £7,200
Actual expenses: £500

If she claims the trading allowance (£1,000), her taxable profit drops to £6,200—below the SPT. She loses her automatic NI credit and must pay voluntary Class 2 NI to protect her pension. But if she claims her actual expenses instead, her profit is £6,700, still below the SPT, but closer to the threshold.

In this case, not claiming the trading allowance and paying voluntary NI is the better long-term choice.

When the Trading Allowance Makes Sense

If your turnover is just above the SPT and your expenses are under £1,000, the trading allowance might reduce your income tax more than the cost of voluntary NI. In that case, it could be worth claiming.

Tip:

You can pay voluntary Class 2 NI for up to six previous tax years, so you don’t need to decide immediately. Wait until you’ve calculated your final profits.

FAQ: Trading Allowance & National Insurance

Q1: What is the trading allowance?

It’s a tax-free allowance of up to £1,000 for self-employed individuals. You can claim it instead of deducting actual business expenses.

Q2: What is the Small Profits Threshold (SPT)?

It’s the minimum profit level (£6,725 for 2024/25) needed to qualify for automatic NI credits toward your state pension.

Q3: What happens if my profits fall below the SPT?

You won’t get automatic NI credits unless you qualify for NI through other means. To protect your pension, you’ll need to pay voluntary Class 2 NI.

Q4: How much is voluntary Class 2 NI?

It’s currently £3.50 per week, or about £182 per year.

Q5: Should I always avoid the trading allowance if I’m near the SPT?

Not necessarily. If claiming it saves you more in tax than the cost of voluntary NI, it might still be worth it. Always compare the two.

Q6: Can I pay voluntary NI later?

Yes, you can pay for up to six previous tax years, giving you time to assess your profits before deciding.

Need Help?

Check out HMRC’s guide to paying Class 2 NI voluntarily, see links below or speak to your accountant to ensure you’re making the best decision for both your short-term tax and long-term pension.