Watching breakfast tv this morning, my ears pricked when they heard a story about women “officially” now being able to top up their pensions if they have too many years contributions missing, by making payments of £400 per year for each year missed. These missing years usually occur when time is taken for having and bringing up a family. But they can also occur when husbands employ their wife/partner in the family business but only pay them just under the NI limit to save a bit of tax on their own business, and also when people think they are being clever in drawing dividends from their Ltd Company and just enough salary not to pay any tax at all.
For many years I have been advising clients against the normal trend of paying no NI contributions if possible in any tax year and I have had quite a bit of stick for it. But people are generally tremendously short-sighted and will look to save a £1 now rather than think about pensions which may not affect their thinking for another 35 years or so. I have always tried to persuade clients to pay their spouse above the NI limit enough so that no gap years accrue unnecessarily. Sometimes I have been successful, but sometimes not. People with gaps in their contributions have always had the opportunity to make up a year to a qualifying year by paying voluntary class 3 contributions – but that was as popular as chocolate teapots.
The thing is that everybody has always had the option to pay and make up for missing contributions which is why I found it funny this morning to hear the generous proposal being offered by the government, but £400 per year is the highest it has ever been to make a year qualify. Perhaps now Gordon Brown has finally started to realize we actually are in a recession – something most people have known for a least a month or two – he sees this as a chance to scoop in a bit more money into the nation’s coffers!
I can hear you asking why missing years are important. Well, to qualify for a full state pension when we get to age 65, we are supposed to have made 39 years contributions into the system by way of National Insurance contributions. I didn’t hear this morning if that has changed but if you have less than 39 qualifying years you have to pay £400 per missed year to bring you up to 39 years if you want to receive a full state pension. So… if you have been working since you left school at 18, you have a potential to accrue 47 qualifying years. If you go to University and leave at 21, you have a possible 44 years. It doesn’t leave much does it. Over your entire working life, the government says you have to have had no more than 5 missing years of NI contributions or they will punish you by severely restricting the pension you are entitled to.
An average lady with a degree, who has taken 15 years to have and bring up her family before returning to work, will have to make up 10 years of contributions totalling some £4,000.
Each year you leave it by the way, the total needed will rise – it always has.
The expert chap who was talking about this on tv this morning said it would probably be worth getting a loan to make up the missing years or you could just rely on pension credits to come to your rescue if your pension is too small to live on. I am not so sure. It would have been much cheaper if people paid each year as they went along and stopped this live for now attitude of not paying tax or NI and opting for dividends instead, and who says pension credits will still be around in 15 or 20 years to bail people out??
The moral to the story is, pay your spouse/partner a proper wage each year and let them pay some tax and NI – remember – it is tax deductible from your profits anyway (paying the back instalments for them won’t be). Dividends are a way of reducing your overall tax liability, but remember the consequences of trying to beat the system. I always advocate paying a salary that is enough to live on and have the excess profits voted as bonuses. That way you protect your position for retirement and still enjoy the benefits of your business success.
Don’t just rely on a state pension for your old age though. We should all be making other arrangements as well – but that is a subject for a whole series of articles!!