Basic State Pension
The Basic State Pension (BSP) is a flat-rate pension paid to
anyone who has paid enough National Insurance contributions or has
enough credits when they reach their State Pension Age (SPA).
Currently, the full rate of BSP is payable if you have qualifying
years of about 90% of the years in your working life. This is
currently 39 years for a woman and 44 years for a man. Your working
life begins at 16 and ends when you reach your SPA. The minimum BSP
is payable if you normally have 10 or 11 qualifying years. This is
normally 25% of the full rate. The more years you work or have
credited then the more BSP you earn.
Those reaching SPA on or after 6 April 2010 will only require 30
qualifying years to claim the full BSP.
Paying NI Contributions
If you are self-employed, you may have to pay
Class 2 National Insurance
Contributions (NICs) and, under certain circumstances, Class 4
NICs as well. It is the payment of these NICs that contribute
towards your BSP entitlement.
Class 2 NICs
You pay the flat-rate Class 2 NICs for every week
that you are self-employed. The current rate is £2.40 per
week. It is paid by Direct Debit or by quarterly bill.
It is possible to be exempt from paying Class 2
NICs (and therefore exempt from any state pension benefits
associated with paying Class 2 NICs) if your net profit is likely
to be less than the Small Earnings Exemption (SEE) limit. The
SEE limit is currently £5,075 per annum. This exemption is
not applied automatically. It must be claimed from HM Revenue
& Customs.
Class 4 NICs
You pay Class 4 NICs in addition to the Class 2
NICs if your trading profits exceed the lower profit limit.
The lower profit limit is currently £5,715 per annum). You
will also pay an extra 1% on any profits above the upper profit
limit. It is paid at the same time as your Income Tax.
Entitlement
Paying Class 2 NICs entitles you to most of the
state benefits that employed people paying Class 1 NICs are, i.e.
the BSP and bereavement benefits.
Full details can be found in our state
pension section. The main exception is that you will not
be entitled to Additional Pension benefits whilst you are
self-employed.
Additional Pension
The Additional Pension is paid in
addition to the BSP. Until April 2002, it was known as SERPS and
depended solely on the National Insurance contributions you paid as
an employee. From 6 April 2002, SERPS was reformed to provide
a more generous additional pension for low and moderate earners,
carers and people with a long-term illness or disability. The
reformed Additional Pension is known as the State Second Pension
(S2P).
The S2P is based upon earnings on which standard
rate Class 1 NI contributions are paid or treated as having been
paid. It provides a top-up to the basic state pension based
on actual or deemed earnings. All employees have to contribute
towards additional pension unless they make alternative
arrangements by contributing to an occupational or personal pension
scheme which is contracted out.
Neither Class 2 nor Class 4 NICs build up an S2P
entitlement. Therefore, for the time you are a self-employed
person, you will not be accruing an Additional Pension.
Full details about the State Pension and how
to claim it can be found in the State Pension section on this
website.
Please note that the Government has
announced changes to the State Pension. The changes affect
the age the State Pension can be claimed, the number of qualifying
years required to claim the full Basic State Pension, flexibility
for those claiming a pension based on a spouse's record, how Home
Responsibilities Protection is calculated and the way pensions are
uprated. Click here for information about the
changes.
