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Beware the Pensions Contributions Trap

SELF EMPLOYED CONTRIBUTIONS

Beware The Pensions Entitlement Trap

To qualify for the full, new State Pension you will need to have 35 years of contributions. At present, the self-employed pay Class 2 (a fixed weekly amount of £2.85) and Class 4 contributions (9% of profits between £8,164 and £45,000, and 2% of profits over £45,000), but only the Class 2 payments contribute towards your 35 years.
 
From April 2018, Class 2 contributions are being abolished.
 
It is likely that from April 2018, if you are self-employed and earn more than the small profits limit (SPL), currently £6,025 for 2017-18, but less than the current lower profits limit (LPL), £8,164 for 2017-18), you will not have to pay Class 4 NIC but you will still receive credits towards your new State Pension entitlement.
 
Thus far good news for the lower paid self-employed.
 
Unfortunately, the news is not quite so good if you earn less than the SPL threshold. Up to April 2018, you could top up your State Pension contributions by making Class 2 contributions, at £2.85 per week. From April 2018, you would need to make Class 3 voluntary contributions, and these are currently £14.25 a week.
 
The annual cost of protecting your State Pension rights would therefore increase from £148.20 to £741.
 
Self-employed with income below the SPL may be able to achieve the same result if they are claiming other benefits: for example, tax credits, child benefit or Universal Credit. If this is the case they would not need to pay the Class 3 contributions and would still receive credits towards their State Pension entitlement.
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