Why the Small Profits Threshold Matters
The Small Profits Threshold is more than just a line on a spreadsheet it determines whether you’re building up qualifying years for your State Pension. Missing qualifying years can mean receiving less pension when you retire.
If your profits are below the threshold and you don’t pay voluntarily:
- You won’t add that tax year as a qualifying year to your NI record.
- Over time, multiple missing years can reduce your retirement income significantly.
Example: A self-employed person with 30 qualifying years instead of 35 could lose 5/35ths of their State Pension – that’s over £1,500 a year at current rates.
How it Relates to Class 2 National Insurance
The Small Profits Threshold and Class 2 NI are directly linked:
- Above threshold: You pay Class 2 NI automatically via your Self Assessment.
- Below threshold: You have the option to pay voluntarily.
Paying Class 2 NI is one of the cheapest ways to secure State Pension entitlement far cheaper than Class 3 voluntary contributions.
For 2025/26:
- Class 2 = £180/year
- Class 3 = £923/year
That’s a huge difference so if you’re self-employed and under the threshold, paying Class 2 voluntarily is usually a smart move.
Who is Affected by the Small Profits Threshold?
The Small Profits Threshold applies to:
It does not apply to:
- Limited company directors (who pay NI via salary/dividends)
- People earning only through PAYE employment
It’s especially relevant to:
- Part-time self-employed workers
- Freelancers with fluctuating income
- Side hustlers with other main income sources
- Early-stage startups still building client bases
Calculating Your Profits
Your profits are your total income from self-employment minus allowable business expenses.
Allowable expenses can include:
- Office supplies
- Marketing costs
- Travel (excluding commuting)
- Professional fees (e.g., accountant)
- Business insurance
Example:
- Turnover: £10,000
- Expenses: £4,000
- Profits: £6,000 → Below the Small Profits Threshold, Class 2 NI is optional.
Impact on State Pension and Benefits
The State Pension is based on qualifying years of NI contributions.
- You need 35 years for the full new State Pension.
- You need at least 10 years for any pension.
If you don’t pay Class 2 NI because you’re under the Small Profits Threshold, you risk gaps in your record. This can also affect:
- Contribution-based Jobseeker’s Allowance
- Maternity Allowance
- Bereavement benefits
Paying Voluntary Contributions Below the Threshold
If your profits are below £6,845, HMRC lets you opt in to pay Class 2 NI voluntarily.
Why you might do this:
- It’s a low-cost way to protect your State Pension
- Avoids the much higher Class 3 voluntary NI rate
- Ensures you remain eligible for certain benefits
To pay voluntarily:
- Indicate your choice in your Self Assessment tax return.
- HMRC will include Class 2 NI in your bill.
Deadlines and HMRC Reporting
- The Small Profits Threshold is measured per tax year (6 April – 5 April).
- HMRC determines your NI liability when you file your Self Assessment.
- You must pay any due Class 2 NI by 31 January following the tax year.
If you miss the deadline for paying voluntary contributions, you can usually backdate but there are time limits (normally 6 tax years).
Common Mistakes to Avoid
- Not checking your NI record – Always check your qualifying years via HMRC’s NI record tool.
- Letting gaps accumulate – One gap might not matter, but several can cost thousands in lost pension.
- Paying Class 3 unnecessarily – If you’re eligible for Class 2, don’t pay Class 3; it’s much more expensive.
- Misunderstanding “profits” – The threshold is based on profits, not turnover.
Tips & Resources
- Plan earnings: If you’re close to the threshold, consider ways to increase profits to cross it and avoid voluntary payment admin.
- Keep records: Accurate expense tracking ensures you know your real profit position.
- Use HMRC tools:
- Get advice: For fluctuating or multiple income streams, an accountant can help optimise NI and tax planning.
Small Profit Threshold Key Takeaways
The Small Profits Threshold is a critical figure for UK self-employed workers, determining when Class 2 NI is payable and influencing future State Pension entitlement. At just £6,845, it’s surprisingly low meaning many part-time or early-stage self-employed people fall below it.
Understanding your position relative to the threshold and choosing whether to pay Class 2 NI voluntarily can make a big difference to your financial security in retirement.
At Accounting Wise, we specialise in guiding self-employed individuals through the complexities of tax and National Insurance. If you’re unsure whether you’re above or below the Small Profits Threshold, or whether voluntary contributions make sense for you, we can help.
Call us today on 0330 113 8442 or request a callback to get tailored advice that protects your pension and minimises your tax bill.
