Recently the question cropped up that as a director of my own limited company, paying a minimum salary, will I still be eligible for a UK basic state pension when the time comes? In this article I’m looking at this question in more depth to uncover all of the answers.
The Basic State Pension
Anyone who is classed as a UK National will automatically be entitled to a basic state pension when they choose to retire. This is a regular payment that comes from the government when they deem you to be at a ‘pensionable’ age. At the moment it’s at the age of 66, although we all know that this is likely to increase as the years go by.
To earn the full amount of state pension you have to have made National Insurance Contributions (NICs) for at least 30 qualifying years. At the time of writing this in 2021, the pension rate is £179.60 per week.
Additions to the Basic State Pension
There are ways you can have additions onto your basic state pension. It’s all based on how much national insurance contributions you made. How much you receive depends on your earnings and whether you’ve claimed certain benefits in the past. The additional pension isn’t fixed, and you will get it automatically when you retire.
National Insurance often gets mistaken for income tax but it’s not the same thing. First off, not everyone has to pay National Insurance. People who are earning an income through the PAYE system or are self-employed, are over the age of 16 but under retirement age will pay National Insurance. If you pay these contributions you can build up your entitlement to receive a state pension.
How Do I Get a Pension Without Paying National Insurance?
Now you’ve got a general overview of how the state pension works, we can get back to our original question. If you are a director, receiving a minimum salary and not paying any NICs, will you still be eligible for the basic state pension?
In short, yes you are. The state pension is based on those qualifying years that you build up, even if you are the director of a company. A qualifying year is classed as a year when:
- You are employed and earning over £184 per week and paying your National Insurance contributions or
- You are employed and earn between £120-£184 per week and are treated as having contributed towards your National Insurance.
Basically, this means you only have to earn over £6,240 in a tax year to qualify for your state pension. You also receive credit for National Insurance if you haven’t paid any contributions, whether you are an employee or employer. This was part of a scheme that was introduced to help those on lower incomes build up their entitlements to benefits. It’s a hugely advantageous scheme for directors too.
How It Works
If you have a salary that falls over the lower earnings limit annually, you still get the year credit even though you don’t pay the National Insurance contributions.
If you earn below this amount then your pension fund loses the credit for the year, although you do have the choice to pay National Insurance voluntarily.
To sum all of this up, paying a small director’s salary each year that is above the lower earning level and topping up earnings with dividends will give you those pension credits while costing you nothing in national insurance contributions.