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AIA

PTP's Tax Tip No.30 ' Director's fees and state second pension

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16th Sep 2005
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Q: I am a partner in a firm of accountants and also a director of a sister company to the firm. My taxable income consists of my partnership profit share and dividends from the company. I pay Class 2 and Class 4 national insurance contributions. Will I be entitled to any state second pension and, if not, should I do anything about it?

A: Only Class 1 contributors will qualify for the state second pension (S2P). However an individual who has employment earnings of at least the lower earnings threshold (currently £82 pw or £4,264 pa) but below the PAYE threshold (currently £94 pw and £4,888 pa) will be a 0% Class 1 contributor and although neither the employee nor employer will have to pay any Class 1 contributions the employee will nevertheless qualify both for basic state pension (BSP) and S2P. Furthermore, for the purposes of S2P such an individual will have deemed income of £12,100. The partner/director in question will qualify for BSP by virtue of being a Class 2 contributor. But by arranging for the company to pay directors fees of, say, £4,300 he will also become entitled to S2P. A director aged 50 who takes such remuneration for the next 15 years could accrue an entitlement to S2P from age 65 of the order of £1,200 pa for no cost in contributions whatsoever. See page 39 of NP46 A Guide to Pensions from the DWP for more detail.

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