Everyone knows that national insurance contributions made by employees qualify them for a state pension when they reach retirement age. But do you know how it actually works? If you own your own limited company then it is important that you understand the system, otherwise you risk missing out.
“…it is important that you understand the system, otherwise you risk missing out.”
The full new state pension is currently £175.20 per week. Even if your outgoings are low its
not a huge amount to live off. However every little helps, as someone once said, so if you do qualify for all of it, or can qualify for all of it, then it is worth making sure you maximise your entitlement and get what you are due.
Like most things presided over by Her Majesty’s Revenue and Customs it is incredibly complicated. We’ll try to keep this simple and only tell you what you need to know - otherwise you’ll lose the will to live.
“In order to get the full £175.20 per week you need to log 35 qualifying years.”
In order to qualify for any state pension you need to have 10 qualifying years. In order to get the full £175.20 per week you need to log 35 qualifying years.
How do I get a qualifying year? The main ways are:
· Claim child benefit;
· Sign on;
· Get a carer’s allowance;
· Make voluntary contributions;
· Make class 4 contributions if your self employed;
· Or the only one we are interested in here – get paid a salary.
Although for many the first 5 points above are good ways to do it, as limited company owners it’s the last one we are interested in. If you’re an employee of someone else’s organisation then it is pretty simple – what you get paid is either enough to get a qualifying year or it is not. However if you’re trying to be a tax efficient limited company owner then you are probably taking your earnings from the company as a combination of salary and dividends. This is where it is important to know the thresholds and understand how it all works.
“If you’re taking your earnings as a combination of salary and dividends it’s important to know the thresholds and understand how it works.”
As I said, this is complicated, so I’m going to keep it as simple as possible. If you are paying
yourself in wages and dividends there two thresholds you need to be aware of: The
Lower Earnings Limit (LEL) and the
Secondary Threshold (ST).
The LEL is the amount of salary you need to earn in order to get a qualifying year for state pension.
The ST is the amount of salary you need to earn in order for the company to have to start paying employers national insurance. In case you’re wondering, the Primary Threshold (PT) is the point at which you start having employees national insurance deducted from your pay. Until recently the PT and the ST were the same, but the ST has now dropped lower than the PT, so it is the ST you need to be aware of.
“…you can pay yourself a high enough salary to get a qualifying year for state pension, but low enough to not have to pay any national insurance…”
What that means is that you can pay yourself a high enough salary to get a qualifying year for state pension, but low enough to not have to pay any national insurance. That is, as long as you keep your wage between the LEL and the ST you will get your qualifying year but not have to pay any NI.
For the 2020/21 year the LEL is £6,240 per year and the ST is £8,784. If you pay yourself a wage for the year of £8,780 you will maximize your corporations tax deduction, earn a state pension qualifying year and not be required to pay any NI.
It is vital that you make sure HMRC knows what you’ve done
If you are not paying enough wages from your company to be required to pay PAYE and NI
then you are not required to register your company for PAYE. Also HMRC no longer requires limited company directors to register for self-assessment if the income they take from their company is not sufficient for them to be required to pay any additional tax.
If your company doesn’t tell HMRC via a PAYE submission and you don’t tell them via a self-assessment tax return, how will they know that you have received sufficient wages to get a qualifying year? It is important that you do one or the other of these two things, otherwise your qualifying year will have no way of making it onto your record.
"...HMRC are notoriously remiss at adding qualifying years to your record..."
In fact, experience tells us that HMRC are notoriously remiss at adding qualifying years to your record that they should know about from your self-assessment return. Therefore it is highly recommended that you go here:
https://www.gov.uk/check-national-insurance-record, sign up for an account and check your record. This will tell you how many qualifying years HMRC currently have on your record.
If you believe there are years when HMRC say no but you believe you earned a qualifying year then write to them at this address:
National Insurance Contributions and Employer Office
HM Revenue and Customs
BX9 1AN
Tell them why you believe their record is wrong and include evidence. If you were registered for PAYE then this will be either a P60 or P45. But if your company was not registered for PAYE then a personal self-assessment tax return will work.
One final point to remember, the thresholds change every year so make sure you allow for this when checking your record, and also make sure you adjust your wage accordingly in coming years.
No one else can protect your pension and make sure that when the day finally arrives you receive all that you are entitled to. And 35 years is quite a long time, so you may as well get all of the benefit you can from it.
https://www.gov.uk/new-state-pension/what-youll-get
https://www.gov.uk/new-state-pension/your-national-insurance-record-and-your-state-pension
https://www.gov.uk/government/publications/rates-and-allowances-national-insurance-contributions/rates-and-allowances-national-insurance-contributions
