Under the old state pension system, the NI contributions of the self-employed built up rights to a basic state pension but not to SERPS – the state earnings-related pension scheme. This meant that someone who was self-employed through their working life could only get a pension of £119.30 per week. Under the post April 2016 system, a self-employed person with 35 years of contributions will qualify for the full flat-rate pension of £155.65 per week. This is an extra £36.35 per week or £1,890 per year of retirement. Over an illustrative 20 year retirement, this pension boost would be worth £37,800.
The Class 4 NICs increase of 1% in 2018/19 and 2019/20 applies to profits above the floor of £8,060 per year. For an illustrative self-employed person earning £25,000 per year, their annual NICs bill will increase by £339 once the full increase has been introduced. But from 2018/19 self-employed people will benefit from the abolition of Class 2 NICs which are currently charged at a rate of £2.80 per week or £146 per year. The combined changes in Class 2 and Class 4 NICs will therefore cost an illustrative self-employed person £193 per year. If this increase was applied over a forty year working life, the total additional NIC bill would be £7,720.
In summary:
- Estimated additional state pension for lifetime self-employed: £37,800;
- Estimated additional NICs bill for lifetime self-employed: £7,720;
Commenting on this analysis, Steve Webb, Director of Policy at Royal London said: “When assessing an appropriate level of National Insurance Contributions for self-employed people, it is important to look at the full picture, including recent changes to the state benefits which the self-employed receive. The new state pension represents a very significant boost for the self-employed which will be worth significantly more than the cost of the NICs increases which have been announced”.
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