Whilst it is highly encouraged to make adequate provision for retirement to avoid being solely dependent on the State Pension in later years, there is no doubt that the State Pension is a valuable part of any retirement plan.
From April 2017, the State Pension increased to £159.55 per week. Put into context – providing this level of income from personal investments may require capital in the region of £275,000, assuming a 3% annual return on investment.
In order to qualify for the full State Pension, you will need to pay national insurance or receive credits for 35 years.
There are several ways to earn a qualifying year:
- Paying Class 1 NIC as an employee – need to earn no less than £113 per week to qualify
- Paying Class 2 NIC as a self-employed person. Note that self-employed also pay Class 4 NIC based on their profit levels however this contribution does not currently affect entitlement to State Pension
- Paying Class 3 NIC voluntarily – costing £741 per annum
- People in receipt of certain state benefits, including jobseeker’s allowance, carer’s allowance and child benefit (for children aged under 12) receive a credit towards their State Pension.
The Class 2 NIC contribution paid by the self-employed used to be invoiced directly to the taxpayer and paid periodically throughout the year. This method of collecting Class 2 NIC ceased in April 2015 and was instead collected via the individual’s Tax Return.
From April 2018 Class 2 NIC is to be abolished. State Pension entitlements will instead be based on Class 4 contributions and using 2017/18 thresholds as a guide, the position would be as follows:
- Taxable profits over £8,164 – 9% Class 4 NIC charge and a qualifying year for State Pension
- Taxable profits between £5,876 and £8,164 (the small profits limit) – no Class 4 NIC charge but still qualify for State Pension
- Taxable profits below £5,876 – no Class 4 NIC charge and no qualifying year for State Pension
Given the volatility in farming profits, it is possible that some farmers may miss qualifying years throughout their working lives. There is a small profits threshold below which, Class 2 contributions do not need to be paid, however in our experience, the low cost and benefits of Class 2 contributions have resulted in it being paid regardless of profit levels. This guarantees the qualifying year for state pension however the abolition of Class 2 means this will no longer be the case from April 2018.
It is therefore important that everyone is aware of how many qualifying years they already have so they can make an informed decision whether or not to pay the more expensive voluntary Class 3 contributions.
You can view your individual National Insurance record online by creating a Government Gateway account, or you can contact HMRC by telephone or post to request a printed National Insurance statement.
If you would like any further information regarding this article, please do not hesitate to contact a member of our agricultural team.
