Self-employed state pension boost 'dwarfs' NICs rise: Royal London

Royal London says that the state pension boost which many self-employed people have received under recent reforms is "significantly greater" than the amount which the self-employed will lose through new National Insurance Contributions changes.

Related topics:  Retirement
Rozi Jones
9th March 2017
Steve Webb
"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"

Yesterday's Spring Budget saw Chancellor Philip Hammond announce higher taxes for the self-employed – with class 4 NICs increasing from 1% to 10% in 2018.

Responses from the mortgage industry have made clear that the move could have negative outcomes for self-employed borrowers, with Precise Mortgages’ Alan Cleary said the move had done ‘nothing to help’ workers who were already at a disadvantage to their employed peers.

However the Royal London calculations show that total additional state pension earnings for self-employed workers could amount to £37,800, compared to an additional NICs bill of £7,720.

Under the old state pension system, the NI contributions of the self-employed built up rights to a basic state pension but not to 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 - worth £37,800 over an illustrative 20 year retirement.

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.

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.”

However Steven Cameron, Pensions Director at Aegon, said that the self-employed "remain second class pensions citizens" as they are not benefitting from being automatically enrolled into a pension, with the added benefit of a valuable employer contribution.

Cameron added: “With pressure mounting and growing calls for a U-turn, the Chancellor could think about softening the blow by agreeing to contribute some of the increase in NI contributions into a private pension of the individual’s choice. This would mean self-employed and gig economy workers immediately had funds in their own pension, a powerful kick-start which they could then contribute more to themselves.

“This is not unlike the ‘contracting out’ system the Government used to offer under which individuals or their employer could choose to receive a rebate in NI contributions to be paid into a private or workplace pension.”

More like this
Latest from Property Reporter
Latest from Protection Reporter
CLOSE
Subscribe
to our newsletter

Join a community of over 30,000 intermediaries and keep up-to-date with industry news and upcoming events via our newsletter.