Changes to National Insurance payments could see thousands of self-employed workers in the UK have their state pension threatened.
A simplification of the NI payments for the self-employed have come into force without much fanfare, though it could mean that the credits built up towards your state pension are stopped; without knowledge of this, you may not notice it until you applied for the state pension in retirement. Women who hope to claim maternity pay could also be affected by the changes, as could those on low incomes or who lose work only to rely on benefits.
These changes could affect your state pension, not your private pension that you will use for the purchase of an annuity or entering income drawdown in retirement.
If you are one of the 4.5 million people in the UK registered as self-employed you will pay 2 forms of NI.
Class 2 NI
This is a contribution of £2.80 per week and offers a relatively cheap way of building up the credits that go towards the state pension, maternity allowance, bereavement benefits and contributions-based employment and support allowance (similar to jobseeker’s allowance buy for the self-employed).
Next April, the new state pension of £151.25 per week will be introduced, but to qualify you will need to have paid 35 years’ worth of NI. The less you contribute, or should you opt out, then the lower your state pension will be.
Class 4 NI
This is the second form of NI paid by the self-employed. It is calculated according to profits and paid with your regular tax payments in January and July.
Previously it has been possibly for the self-employed to pay Class 2 NI via a weekly direct debit. This allows the management of payments to ensure the credits are being collected. The direct debit facility will cease in July 2015.
From July, Class 2 NI payments will be collected with regular tax payments as part of the self-assessment – but the first Class 2 contribution won’t be collected until January 2017.
What Impact this will have
This delay will mean a gap in payments of 78-weeks (18 months). While this may have a minor impact on your state pension (and none if you still collect the 35 years’ worth of credits), for women wanting to claim maternity benefits they are required to pay NI for at least 13 of the 66 weeks prior to the baby’s birth. With a 78-week gap in payments, many women won’t reach this qualifying number of weeks, and their maternity pay could be drastically cut or be none existent.
Regarding the state pension, problems occur if you are one of the 300,000 ‘small profit’ earners: those whose current tax year profits are less than £5,965. They will not have Class 2 NI collected as part of their self-assessment, will miss out on building up credits and therefore have their state pension allowance reduced.
Ensuring your Class 2 Payments are met
This is where things start to get confusing, despite the new process being put in place to simplify the system.
The Department of Work and Pensions (DWP) have advised that the self-employed use HMRC’s budget plan option, making Class 2 NI payments weekly or monthly in advance.
There is still uncertainty for those falling below the small profits threshold, but it’s suggested that when payments are allocated as part of the self-assessments in January and July, people must elect to have cash used to pay voluntary Class 2 NI.
You can find out more information about paying National Insurance as a self-employed work at the official UK government website – Gov.uk
This article was created with the help of Ryan Smith, part of the content development team at My Retirement Options, connecting retirees with an independent financial advisor for the best advice on annuities, income drawdown and other retirement income options.