What is the difference between Class 2 and Class 4 National Insurance?

Understanding National Insurance in the UK

National Insurance (NI) is a cornerstone of the UK’s tax system, but it often feels less straightforward than Income Tax. In broad terms, NI contributions help fund certain state benefits and are a key part of how the government raises money to support public spending. The tricky part is that NI is not one single “charge” that everyone pays the same way. Instead, it is divided into different “classes” depending on your employment status and the type of income you receive.

If you are employed, you usually pay Class 1 National Insurance through PAYE, with contributions calculated on your earnings. If you are self-employed, the picture changes: historically, self-employed people have paid a mix of Class 2 and Class 4 National Insurance, each with different rules, thresholds, and purposes. That difference—between Class 2 and Class 4—is what this article explains in depth.

At a high level, Class 2 and Class 4 are both linked to self-employment, but they are not interchangeable. They are assessed differently, collected differently, and they have different relationships to benefit entitlement. Understanding how each class works is important for budgeting, completing a Self Assessment return, and making informed decisions about your business structure and profitability.

Who pays Class 2 and Class 4 National Insurance?

Both Class 2 and Class 4 National Insurance are associated with self-employment. If you are registered as self-employed and you complete a Self Assessment tax return, you may be liable for one or both classes, depending on your profit levels and your circumstances.

Class 2 has traditionally been described as a “flat rate” contribution for the self-employed. The key idea is that it is based on your status as a self-employed person rather than being tightly tied to how much profit you earn. However, you do not necessarily pay it if your profits are low; there is usually a profits threshold that determines liability or whether you can choose to pay it voluntarily.

Class 4, on the other hand, is profit-related. It is calculated as a percentage of your taxable profits from self-employment (and, in many cases, from partnership income). That means Class 4 generally rises as your profits rise. If you have a modest year, your Class 4 might be low or even zero. If you have a strong year, Class 4 could be one of the bigger line items on your tax bill.

It’s also worth noting who does not pay these classes. Employees do not pay Class 2 or Class 4 on their wages; they pay Class 1. Company directors and shareholders usually pay NI through Class 1 on salary, and may pay dividend tax on dividends (dividends do not attract NI). People with rental income typically do not pay Class 2 or Class 4 on rents (though there are special rules in some cases, and property businesses can have different tax considerations). In short: Class 2 and Class 4 sit firmly in the self-employment world.

Core difference #1: Flat-rate versus profit-based contributions

The most intuitive difference between Class 2 and Class 4 National Insurance is how they are calculated.

Class 2: a flat weekly amount (subject to rules and thresholds)

Class 2 has historically been a fixed weekly amount. Think of it like a membership fee for being self-employed, rather than a charge that scales directly with your income. If you are liable, you typically pay the same weekly amount regardless of whether your profits are just above the relevant threshold or significantly higher.

This flat-rate design means Class 2 is relatively predictable once you know whether you have to pay it. Predictability can be helpful for micro-businesses and sole traders who want stability, but it can also seem odd: someone making a modest profit could pay the same Class 2 amount as someone making a far larger profit (assuming both are liable). That’s one reason why the system has periodically been reviewed and reformed.

Class 4: a percentage of profits

Class 4 is calculated as a percentage of your taxable profits. That makes it more like a traditional tax in the sense that it rises with your capacity to pay. It is generally applied above a lower profits limit, and sometimes there is an upper profits limit where the rate changes. This structure means that your Class 4 bill is closely tied to the success of your business in that tax year.

For many self-employed people, Class 4 is the NI contribution that feels the most “expensive” because it scales with profit. It is also the class that can create surprises if profits rise sharply or if you have a one-off income spike—because your NI liability increases in step with that profit.

Core difference #2: Relationship to state benefit entitlement

Another major difference is what each class does (and does not) do for your entitlement to certain state benefits. This is where many people get confused, because “National Insurance” sounds like it should work like an insurance policy—pay in, get covered. In practice, NI is partly about raising revenue and partly about maintaining contribution records for certain benefits.

Class 2 and benefit entitlement

Class 2 is historically linked to building entitlement to certain contributory benefits. It has been associated with maintaining your National Insurance record, which can matter for things like the State Pension and some contribution-based benefits. For the self-employed, paying Class 2 (when liable, or voluntarily in some cases) has often been a key way to ensure your NI record remains complete.

This is why Class 2 has frequently been described as “important” even though the cash amount might be relatively small compared with income tax or Class 4. The real value of Class 2 is not simply the weekly cost; it is the potential impact on your contribution history.

Class 4 and benefit entitlement

Class 4 is different. Although it is called “National Insurance,” it has historically not built the same range of contributory benefit entitlements as Class 2. In many explanations, Class 4 is described as not counting towards certain benefits in the way Class 2 does. That can feel counterintuitive: you might pay a substantial amount of Class 4 in a profitable year, but it may not improve your benefit entitlement in the same way paying Class 2 does.

So, if you remember one thing, make it this: Class 2 has traditionally been the class more closely connected with your NI record for contributory benefits, while Class 4 is primarily a profit-based contribution that raises revenue and does not necessarily add equivalent benefit “credits.”

Core difference #3: How they are collected and paid

Even though both are linked to self-employment, the mechanics of paying Class 2 and Class 4 are not identical, and the way they show up on your paperwork can differ.

Class 2 collection

Historically, Class 2 was often paid as a regular amount, sometimes by direct debit. Over time, the system shifted so that many self-employed people pay Class 2 through their Self Assessment process, calculated for the year alongside other liabilities. In practice, when you complete your tax return, the system determines whether Class 2 is due and includes it in your overall bill (unless you are exempt or have low profits and do not opt to pay voluntarily).

Because it is flat-rate, the calculation is usually simpler once liability is established: it is often a weekly amount multiplied by the number of weeks you were self-employed in that tax year (or a similar approach depending on the rules in force). If you started or stopped self-employment partway through the year, that can affect the number of weeks charged.

Class 4 collection

Class 4 is typically calculated as part of Self Assessment, based on your taxable profits. That means you do not usually pay it weekly or monthly during the year; instead, it forms part of your annual tax bill. Your profit figure is central: higher profits generally mean higher Class 4, subject to the lower and upper limits and any rate changes that apply in the relevant tax year.

This also means that Class 4 can interact with payments on account. If your Self Assessment bill is large enough, you may be required to make payments on account toward the following year’s tax and Class 4 liability. For many self-employed people, this is the point where NI feels most financially significant: you may pay a large bill in January that includes income tax and Class 4 for the previous year, plus advance payments toward the current year.

Core difference #4: Thresholds and triggers

The two classes are triggered by different conditions and thresholds. While both depend on self-employment, the details matter.

Class 2 thresholds and low-profit rules

Class 2 is typically connected to whether your profits exceed a small profits threshold. If you are under that threshold, you might not have to pay Class 2, but you may be allowed to pay it voluntarily to protect your NI record. This can matter for people who are starting out, running a business part-time, or having a difficult year.

That voluntary option (where available) is an important planning tool. Someone who expects to be self-employed only briefly, or who has low profits due to caring responsibilities or other commitments, may still want to make contributions to avoid gaps in their record. The key is that Class 2 has often been the “gateway” for self-employed people to maintain contribution continuity at a relatively low cost.

Class 4 thresholds and profit bands

Class 4 generally starts once profits exceed a lower profits limit. Below that limit, Class 4 is usually not due. As profits rise above the limit, Class 4 applies at a main percentage rate, and beyond an upper profits limit, a second rate may apply. The existence of bands means Class 4 is more sensitive to your profit level, and it creates marginal changes: each additional pound of profit above the threshold can increase your Class 4 liability (up to the upper limit, and then at a different marginal rate above it).

Because Class 4 is percentage-based, understanding your profit position near key thresholds can be useful. For example, timing expenses, invoicing, or capital purchases can affect your taxable profit and therefore the Class 4 you owe for the year. You should never distort business decisions solely to chase tiny tax differences, but being aware of the thresholds helps you avoid surprises and plan cash flow.

How Class 2 and Class 4 show up on a Self Assessment tax return

When you complete Self Assessment, the NI contributions for self-employment can appear as part of the overall calculation. If you are a sole trader, you enter your business income and allowable expenses, calculate your taxable profit, and the tax software (or HMRC’s system) calculates the tax and NI due.

Class 2 may be listed as a separate line item, and Class 4 is also commonly shown separately. This separation is not just cosmetic: it reflects that the two classes have different legal bases and different calculation methods. Seeing them separately can also highlight the difference in scale. In many cases, Class 2 might look relatively small, while Class 4 could be a more substantial figure in a profitable year.

If you are in a partnership, the process can be more complex because profits are allocated among partners and Class 4 is calculated on the individual partner’s share. Nonetheless, the same principles apply: Class 2 relates to your status and thresholds, while Class 4 relates to the profit amount allocated to you.

Examples to illustrate the difference

Sometimes the easiest way to understand the difference is to see how the two classes behave under different profit levels. The following examples are conceptual, focusing on how the system works rather than quoting specific rates or thresholds (which can change over time).

Example 1: Low profits, below the Class 2 threshold

Imagine a self-employed person who earns a small profit from a side business. Their profits are below the small profits threshold for Class 2. In this situation, they may not be required to pay Class 2. Because their profits are also below the lower profits limit for Class 4, they would not pay Class 4 either.

However, this person might choose to pay Class 2 voluntarily (if allowed) to protect their National Insurance record. This is a key difference: Class 2 can sometimes be paid voluntarily as a strategic decision, whereas Class 4 is usually purely profit-driven and does not offer the same “voluntary top-up” role in the same way.

Example 2: Moderate profits

Now imagine someone whose self-employment profits are comfortably above the Class 2 threshold and above the Class 4 lower profits limit, but not extremely high. In this scenario, they are likely liable for Class 2 (a flat amount) and Class 4 (a percentage of profits above the lower limit).

Their Class 2 bill is relatively predictable. Their Class 4 bill depends on profit. If they have a slightly better year, Class 4 rises; if they have a slightly worse year, Class 4 falls. Class 2 stays broadly stable as long as they remain liable and self-employed for the relevant weeks.

Example 3: High profits

Finally, consider someone with high self-employment profits. They pay the same flat Class 2 amount (assuming liability) as the person with moderate profits, but they pay significantly more Class 4 because Class 4 scales with profit. If there is an upper profits limit where the rate changes, the structure may mean they pay one rate up to that upper limit and another rate above it.

This example shows why Class 4 is often the main NI cost for successful self-employed businesses. Class 2 may still matter for benefit entitlement, but it usually does not drive the size of the bill. Class 4 is the major moving part.

Why do we have both Class 2 and Class 4?

It’s reasonable to ask why the system is split into two classes at all. The answer lies in history and policy goals. The UK has long treated employed and self-employed people differently for National Insurance. Employees pay Class 1, which is tied to earnings and contributes to benefit entitlement in a way the system defines. The self-employed have traditionally paid a lower overall NI burden than employees on equivalent income, reflecting differences in employment rights and benefits, but also raising debates about fairness.

Class 2, as a flat-rate contribution, created a simple mechanism for self-employed people to build contributory benefit entitlement at a relatively low cost. Class 4, as a profit-based contribution, added a revenue-raising element that scales with business success. Having both classes allowed the system to balance simplicity (Class 2) with progressivity (Class 4).

Over time, governments have revisited these distinctions, sometimes proposing reforms to merge classes, adjust rates, or change thresholds. Even when policy changes are proposed or implemented, the conceptual split between a contribution tied to benefit record-building and a contribution tied to profits is a useful lens for understanding the system.

How do Class 2 and Class 4 compare to Class 1 for employees?

Understanding the difference between Class 2 and Class 4 becomes easier when you compare them to what employees pay. Employees pay Class 1 National Insurance on earnings from employment. The employee contribution is deducted through payroll, and the employer also pays an additional contribution (employer’s NI). For employees, NI is often felt as a regular deduction from each payslip, creating an immediate sense of what you “take home.”

Self-employed people do not have an employer paying NI on top of their earnings. Instead, they handle their own contributions through Self Assessment. Class 2 provides a basic contribution mechanism, and Class 4 provides a profit-linked mechanism. The lack of an employer contribution is one reason self-employment can appear to have a lower NI burden, though self-employed people also shoulder other costs and risks that employees may not face.

Another important distinction is timing. Employees pay NI throughout the year as they earn. Self-employed people often pay in lump sums through Self Assessment, which can create cash flow challenges if you do not set money aside. Even if your overall liability is similar, the experience of paying it can be very different.

Practical implications for self-employed budgeting and cash flow

From a practical perspective, the difference between Class 2 and Class 4 affects how you budget. Class 2, because it is flat-rate, can be thought of as a fixed cost of being self-employed (if you are liable). In a simple budgeting plan, you might treat it like a subscription: you know roughly what it will be and you can factor it in early.

Class 4 is variable. If your profits rise, your Class 4 bill rises. That means you should plan for Class 4 as a percentage-like cost that increases as your business succeeds. A common approach is to set aside a portion of each payment you receive into a separate “tax pot.” That pot can cover Income Tax and Class 4, and also any other liabilities you anticipate. The exact percentage to set aside depends on your overall tax situation, but the principle is consistent: Class 4 is linked to profit and can create a sizeable year-end bill.

Because both classes are generally handled through Self Assessment calculations, they can also interact with the timing of payments. If you are new to self-employment, the first big January payment can feel like a shock because it may include tax and Class 4 for the previous year plus payments on account for the current year. Understanding that Class 4 is part of that bundle helps you plan and avoid being caught short.

What if you have both employment and self-employment income?

Many people have a mix of income sources: a job and a side business, or a part-time role plus freelancing. In these cases, the NI picture becomes more complex, because you could pay Class 1 on employment earnings and also pay Class 2 and Class 4 on self-employment profits.

It is important to understand that the different classes apply to different income types, not to the person as a whole. Employment earnings attract Class 1. Self-employment profits attract Class 2 and Class 4 (subject to thresholds and rules). This is why someone can simultaneously see NI deducted from payslips and also face NI liabilities through Self Assessment.

There may be considerations around overall contribution records and maximums, but conceptually the system treats the streams separately. If you are in this position, the key practical step is to avoid forgetting that your self-employment profits can generate additional NI on top of what you already see on your payslip.

What if your self-employment makes a loss?

If your self-employment makes a loss (meaning allowable expenses exceed income), your taxable profit is zero or negative. In that case, Class 4—being profit-based—would usually be nil. Class 2 liability depends on the rules and thresholds. If your profits are below the relevant threshold, you might not be required to pay Class 2, but you may be able to pay voluntarily. That’s one of the reasons Class 2 is often discussed in the context of low profits, start-up years, or fluctuating business performance.

A loss-making year can be stressful, and it can also have knock-on effects for your contribution record if you do not accrue qualifying years for benefits. This is where understanding the role of Class 2 matters: it may give you a pathway to keep your record active even when profits are low. The right decision depends on your broader circumstances, your expected future earnings, and your long-term planning, especially regarding the State Pension.

Do Class 2 and Class 4 apply to limited companies?

If you operate through a limited company, you are not typically treated as self-employed for NI purposes on the company’s profits. Instead, the company is a separate legal entity. As a director, you may pay Class 1 National Insurance on the salary you take, and the company pays employer’s NI on that salary (subject to thresholds). Dividends paid to you are not subject to National Insurance, though they are taxed under dividend tax rules.

This distinction is crucial: a move from sole trader to limited company can change your NI position significantly. As a sole trader, Class 2 and Class 4 are the primary NI classes you deal with. As a company director/shareholder, Class 1 becomes more relevant, and the mix of salary and dividends becomes a planning factor. That said, running a limited company brings additional responsibilities and costs, so it is not simply an NI decision.

Common misunderstandings about Class 2 and Class 4

The terms “Class 2” and “Class 4” can feel abstract, so it’s no surprise people form misconceptions. Here are some common misunderstandings and the clarifications that help.

Misunderstanding 1: “Class 4 counts the same as Class 2 for benefits”

This is one of the most frequent points of confusion. People assume that because both are called National Insurance, they must both build the same entitlement. In reality, Class 2 has historically been the contribution more closely tied to contributory benefit entitlement for the self-employed, while Class 4 is more like an additional profit-based contribution that does not necessarily add the same benefit credits.

Misunderstanding 2: “If I pay Class 1 at my job, I won’t owe any NI on self-employment”

Having Class 1 deductions from employment does not automatically remove Class 2 or Class 4 liabilities from self-employment. The system looks at each income type. You can pay NI through multiple classes in the same year if you have multiple forms of income.

Misunderstanding 3: “Class 2 is optional for everyone”

Class 2 may be optional only in certain circumstances, often linked to low profit levels or exemptions. If you are liable, it is not simply a choice. The “voluntary” concept tends to apply when you are below the threshold but want to protect your NI record.

Misunderstanding 4: “Class 4 is paid weekly like Class 2”

Class 4 is generally calculated annually through Self Assessment based on profits, rather than as a simple weekly amount. That difference affects budgeting: Class 4 can build up silently through the year and only become visible when you total your profits and complete your tax return.

How to plan for Class 2 and Class 4 in real life

Understanding the differences is helpful, but the bigger goal is making the information useful. Here are practical ways to apply it.

First, treat Class 2 as a fixed cost (if you are liable) and Class 4 as a variable cost tied to profit. When you forecast your business finances, include both. If you estimate profits, you can estimate Class 4 more realistically, even if you do not know the exact figure until the year ends.

Second, set aside money regularly. A separate bank account for tax can reduce stress and help avoid the temptation to spend funds that are effectively owed to HMRC. Because Class 4 is percentage-based, setting aside a consistent percentage of income is often a good strategy, adjusting if your profits trend higher or lower than expected.

Third, keep good records. Class 4 depends on taxable profit, which depends on what expenses you claim and how accurate your record-keeping is. Missing expenses could mean higher profit on paper and therefore higher Class 4, even though your real-world cash situation is tighter. Accurate bookkeeping is not just compliance; it affects your liability.

Fourth, think about your NI record. If you have low profits and are not required to pay Class 2, consider whether paying voluntarily would be beneficial for you. This is a personal decision tied to your broader contribution history and future plans, but it is one of the most important “difference-makers” between Class 2 and Class 4.

How the difference affects new freelancers and sole traders

When you first become self-employed, you may not be thinking about National Insurance at all. You are focused on finding clients, pricing your work, and handling admin. The Class 2 versus Class 4 distinction becomes relevant quickly, though, because new freelancers often have uneven income in the first year.

In a low-income first year, Class 4 may be minimal or nil, but Class 2 could still matter for your NI record (depending on thresholds and voluntary options). In a strong first year, Class 4 can become significant and can increase your first Self Assessment bill. That is why many experienced freelancers recommend setting aside money from the very first invoice rather than waiting to see how the year turns out.

New sole traders can also be caught off guard by the timing of the first Self Assessment payment. If you start trading early in a tax year, you may have a substantial profit figure by the time the year ends, and your first tax return could generate a bill that includes Income Tax and Class 4, plus payments on account. Knowing that Class 4 is profit-linked helps you anticipate that jump.

How the difference affects established self-employed people

For established self-employed people, Class 2 and Class 4 become part of routine planning. Class 2 is often a stable background item, while Class 4 can become a planning focus because it is sensitive to profit levels and can be influenced by business decisions such as investment, timing of expenses, and changes in workload.

Established businesses may also experience profit volatility. A great year can mean a bigger Class 4 bill, which is good news in the sense that it reflects strong performance, but it can still strain cash flow if funds were not set aside. Conversely, a difficult year can reduce Class 4, but that might coincide with other pressures, making the NI record question (and whether Class 2 is due or worth paying voluntarily) more salient.

Summary of the key differences

By this point, the contrast should be clear. Class 2 and Class 4 are both National Insurance contributions linked to self-employment, but they operate differently. Class 2 has historically been a flat-rate contribution connected more directly to maintaining your contribution record for certain benefits. Class 4 is a profit-based contribution calculated as a percentage of taxable profits, functioning more like an additional tax on self-employment earnings and not necessarily providing the same benefit-building effect as Class 2.

They also differ in how predictable they are, how they respond to changes in profit, and how they can be managed. Class 2 is often about status and thresholds, while Class 4 is about profit bands and rates. Both typically show up in Self Assessment calculations, but they can feel very different in practice: Class 2 as a smaller, steadier amount, and Class 4 as the larger, variable charge that grows with business success.

Final thoughts

National Insurance is one of those topics that becomes much easier once you understand the logic behind the categories. If you are self-employed, Class 2 and Class 4 represent two different ideas: a baseline contribution tied to your contribution record, and a profit-based contribution tied to your capacity to pay. Knowing which is which helps you plan your finances, interpret your Self Assessment calculations, and make better decisions about budgeting and record-keeping.

If you take away a single practical lesson, let it be this: Class 4 is the NI contribution you need to plan for as profits rise, while Class 2 is the contribution you should understand in terms of thresholds and your long-term NI record. When you see them side by side on your tax calculation, you will know why they are different—and why both exist in the system.