Self employment trap - pension

Self employment trap - pension

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So long now I've seen SEment as a trap. In that if it ends some crucial benefits are no longer within the reach of the person.
Aswell as affecting your state pension in older age... Something many overlook.

But I recently read something about the pension aspect changing and self employed shouldn't be disadvantaged now.

can you guys kindly clarify this? or correct me?

I have been thinking about paying myself my poultry SE earnings through paye under a limited. Are there any other benefits of doing this other than the two mentioned?

Replies (5)

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Stepurhan
By stepurhan
27th Aug 2014 10:54

State pension

I am assuming you mean that, if the self-employment is low earning then there will be no NIC record and hence reduced pension entitlement. This is no different than someone in PAYE in a job paid below the lower earnings limit. If you think the self-employed are worse off on state pension in some other way, please link to your source. For that matter, can you locate the "something" you read that changes this?

If your self-employed earnings are truly paltry (I am assuming you don't deal in chickens) then setting up a limited is likely to create more trouble than it is worth.

 

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By Paul Soper
27th Aug 2014 12:17

Ending state second pension

Employees were at an advantage over the self-employed because they could pay NIC under Class 1 which entitled them to the state second pension as well as the basic pension.  The self-employed could pay under Class 2 which only entitled them to the basic pension and not the additional pension.

However if they had little other income then they could claim pension credit which would provide an additional income up to a level equal to the sum of the two pensions.

From 2016 that pension system comes to an end, the basic pension will now be the only pension payable and will be at an amount equal to the sum of the basic pension plus pension credit (but of course it will be taxable, pension credit isn't).  From this point onwards the pension entitlement of employees and the self employed will be the same.  Two consequences, one we know, one I suspect.

Employees and employers will no longer be able to contract out of the state second pension so NIC paid by many employees will increase as 'contracting-out' comes to an end.

At present Class 4 provides no benefits at all, it is simply an additional tax.  Class 2 was significantly reduced many years ago to reflect the disparity in pension entitlement.  Class 2 and 4 will now be collected together through SA and I would not be surprised to see a significant hike in Class 2 to balance the enhanced pension entitlement.

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By arcon5
27th Aug 2014 20:16

That is what I was referring to, the enhanced pension.

last couple of years I've been concerned about my self employment - I become UN employed for a short period and was horrified to discover I had no entitlement to jsa due to my self employment and the way SE NICs work.
I was also concerned about the way pensions work and feared I was walking in to poverty with SEment.
allthough it seems I don't have to worry about that now?
but I still wonder what other pitfalls there is to self employment which could bite me in the [***].

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Stepurhan
By stepurhan
28th Aug 2014 08:49

Confused

OK, the second pension entitlement (or lack thereof) wasn't something I knew about already. Thanks Paul. Lack of entitlement to JSA while self-employed should hardly be surprising though. If you are self-employed you are, by definition, not unemployed.

I am confused though. The OP is talking about possibly moving to a limited company in the future and yet is talking in this query about having to compile company accounts. As I said earlier this is more trouble than it is worth at the income level we are talking about.

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By arcon5
28th Aug 2014 09:27

A self employed person can become unemployed. If a businessman closes up shop or a taxi driver looses his council badge.
The shock for me was when I become unemployed (ie bbusiness shut down, seeking FT employment) and because my partner worked 20hrs per wk I was not entitled to either type of JSA. Contributions based on class 1 nic and class 2 and 4 disregarded

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