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Tax Insider Tip: Pay A Small Salary To Preserve State Pension Entitlement

6th Dec 2013
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Entitlement to the state pension and contributory benefits is contingent on having paid sufficient National Insurance contributions. Fortunately it is possible to achieve this for zero cost.
 
Persons with earnings between the lower earnings limit (£109 per week for 2013/14) and the primary earnings threshold (£149 per week for 2013/14) are treated as paying NICs at a zero rate. These notional contributions preserve entitlement to the state pension and contributory benefits.
 
Because the secondary threshold is slightly lower (£148 per week for 2013/14), it is advisable to pay a salary of between £109 per week and £148 per week to protect pension entitlement without paying any NICs. This equates to an annual salary between £5,668 and £7,696.
 
As this is below the personal allowance, providing the person does not have a second job to which the personal allowance has been allocated, no PAYE tax should be due either. However, under real time information (RTI), details of the amount paid to the employee must be reported to HMRC electronically.
 
Example:
Ian and Caroline are directors of their family company. To preserve entitlement to the state pension and contributory benefits they decide to pay themselves a salary of £7,200 (£600 per month).
 
As this is between the lower earnings limit and the secondary earnings threshold they get the benefit of notional contributions but do not have to pay any actual employee or employer contributions.
 
However, under RTI they need to make a submission to HMRC each time that they make a payment.
 

This is a sample tip taken from our 136 page guide:
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