Self-employed state pension boost 'dwarfs' NICs rises

New calculations by Royal London show that the state pension boost which many self-employed people have received under recent reforms is significantly greater than the amount which the self-employed will lose through recently announced NIC changes.

Under the old state pension system, the NI contributions of the self-employed built up rights to a basic state pension but not to SERPS – the state earnings-related pension scheme.   This meant that someone who was self-employed through their working life could only get a pension of £119.30 per week.   Under the post April 2016 system, a self-employed person with 35 years of contributions will qualify for the full flat-rate pension of £155.65 per week.   This is an extra £36.35 per week or £1,890 per year of retirement.   Over an illustrative 20 year retirement, this pension boost would be worth £37,800.

The Class 4 NICs increase of 1% in 2018/19 and 2019/20 applies to profits above the floor of £8,060 per year.   For an illustrative self-employed person earning £25,000 per year, their annual NICs bill will increase by £339 once the full increase has been introduced.   But from 2018/19 self-employed people will benefit from the abolition of Class 2 NICs which are currently charged at a rate of £2.80 per week or £146 per year.   The combined changes in Class 2 and Class 4 NICs will therefore cost an illustrative self-employed person £193 per year.   If this increase was applied over a forty year working life, the total additional NIC bill would be £7,720. 

In summary:

Estimated additional state pension for lifetime self-employed: £37,800;

Estimated additional NICs bill for lifetime self-employed: £7,720;

Commenting on this analysis, Steve Webb, Director of Policy at Royal London said:

“When assessing an appropriate level of National Insurance Contributions for self-employed people, it is important to look at the full picture, including recent changes to the state benefits which the self-employed receive.   The new state pension represents a very significant boost for the self-employed which will be worth significantly more than the cost of the NICs increases which have been announced”.