Will I be eligible for State Pension and Benefits if paying myself minimum salary?

  • November 14, 2013
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  • Comments Off on Will I be eligible for State Pension and Benefits if paying myself minimum salary?
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  • Income Tax, Tax

This article was written during November 2013 and rules may have changed if you are reading this later. The thresholds mentioned will change slightly each year. You can see the current thresholds here – http://www.hmrc.gov.uk/rates/nic.htm

The Short Answer

Yes – as long as you are taking a salary of more than £5,668 per year you will get your National Insurance ‘stamps’ and eligibility for state benefits including the state pension.

The Question

If you are taking a minimum salary of £640 per month (for the 2013/14 tax year) you will not be paying any National Insurance. This leads some people to wonder whether they will remain entitled for the benefits that National Insurance bring.

Historically people have referred to this as getting their national insurance ‘stamps’.

What are the benefits?

The benefits that getting your National Insurance stamp bring includes: 

  • Basic state pension
  • State second pension
  • Jobseeker’s Allowance – though not the ‘contribution based’ scheme.
  • Employment and Support Allowance
  • Maternity Allowance
  • Bereavement Benefits

How do I get ‘stamps’?

To be eligible for the above benefits you need to be earning a salary (not dividends or rental income but a salary) higher than what HMRC calls the  Lower Earning Limit. In the 2013/14 tax year that was £109 per week (or £5,668 per year).

What’s strange and causes the confusion is that although this is the level where you start to generate the benefits the level where you actually start having to pay National Insurance Contributions is the ‘Primary Threshold’. In the 2013/14 tax year that was £146 per week (or £7,592 per year).

Most Ltd company owners set their salary just below the Primary Threshold so that they can minimise their tax, whilst still being eligible for benefits.

A note about state pensions

We would very strongly recommend that you make separate provisions for your retirement beyond the state pension. The finances of these schemes are a mess and it’s highly unlikely they will exist in their current form in twenty or so years.

References

You can find out much more about state benefits here – https://www.gov.uk/browse/benefits

 

Basic Guide to Income Tax

This is a very basic guide to income tax written for those with no prior knowledge. Unfortunately real life is not so simple. there are many many ‘if this then this’ type situations in tax law so please consult an expert who knows about your full situation rather than relying solely on this information.

Thresholds and rates in this post are based on the 2013/14 tax year.

What is taxed as part of income tax?

  • Salary from employment
  • Profits of a trade carried out as a self-employed person (ie outside of a ltd company)
  • Pension income*
  • Bank interest*
  • Share dividends*
  • Rental income (from a buy to let, for example)*

* Considered ‘Investment Income’ which does not incur any National Insurance charges

Income tax rates

The following tax rates apply to those earning less than £100,000 per annum. If you are earning more, congratulations, then search google for ‘Personal Allowance over £100,000’.

£0 – £9,440 0%
£9,440 – £42,475 20%
£42,475 – £100,000 40%

As an example let’s say someone is earning a profit as a self-employed person of £20,000 and receives a rental income of £10,000 per year, so a total of £30,000. They would incur tax as follows:

The first £9,440 taxed at 0% = £0
£9,440 to £30,000 at 20% = £4,112
Total = £4,112

National Insurance when self-employed

Class 4 NICs

If you are self-employed in addition to income tax you must pay Class 4 National Insurance Contributions. The 2012/13 rates for these are:

£0 – £7,755 0%
£7,775 – £41,450 9%
£41,450 + 2%

So going back to our example. The self employed person earning a profit of £20,000 will have to pay:

The first £7,775 at 0% = £0
£7,776 to £20,000 at 9% = £2,444.80
Total = £12,224

Note that the rental income does not incur any national insurance.

Class 2 NICs

The self-employed must also pay Class 2 NICs. These are much cheaper at a flat rate of £2.70 per week.

National insurance when in full time employment

The full time employed pay Class 1 National Insurance. This will always be deducted from their salary via PAYE. So we won’t discuss it any further here.

Company dividends (they’re different)

We’ve previously written a very detailed guide to dividends for limited companies, which may help. In short though dividends have their own tax rates:

£0 – £42,475 (total earnings) 0%
£42,475 – £100,000 (total earnings) 25%

Two things to bear in mind are:

  1. Add up all your earnings and then the dividends last. If you earn £40,000 from other sources and then earn £10,000 of dividends the first £2,475 will be at 0% (taking you up to £42,475) and then the remaining £7,525 will be taxed at 25%.
  2. The dividend tax credit distorts the thresholds above. Read our dividend tax credit guide to learn more.

Income tax payments deadlines and tax return deadlines

The income tax year runs from 6 April to 5 April. So the most recent at the time of writing is 6 April 2012 to 5 April 2013 (known as 2012/13). Payment is then due in the following January (ie. 31 January 2014)

The deadline for submitting your income tax return (an SA100 in HMRC’s language) is due on the same date.

Payments on Account

You may also have to make Payments on Account, which are advance payments for the next tax year.

So when you come to pay your first (2012/13) tax bill on 31 January 2014 you will have to pay an extra 50% to cover the 2013/14 tax year and then the remaining 50% on 31 July 2014, all based on the assumption that next year’s tax bill will be the same as this year’s.

So this means the first time you pay income tax you will probably have to pay 150% of your tax bill!

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