Entitlement to the state pension and contributory benefits is contingent on having paid sufficient National Insurance contributions. But can you achieve this for zero cost?
THE LEL AND THE PET EXPLAINED
Persons with earnings between the lower earnings limit LEL (£112 per week for 2016/17) and the primary earnings threshold PET (£155 per week for 2016/17) are treated as paying NICs at a zero rate. These notional contributions preserve entitlement to the state pension and contributory benefits.
THE REQUIRED SALARY LEVEL
For 2016/17, setting the salary between £112 per week and £155 per week will ensure that the year is a qualifying year for state pension purposes for zero NIC cost. This equates to to an annual salary of between £5,824 and £8,060. 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. For 2016/17, the primary threshold is less than the secondary threshold (at £156 per week), so at this level no employer’s National Insurance is due, regardless of the age of the employee/director and regardless of whether the employment allowance is available.
Maisie and Alice are directors of a small Limited company. To preserve entitlement to the state pension and contributory benefits they decide to pay themselves a small salary of £7,200 each (£600 per month).
As this is between the lower earnings limit (£112 per week for 2016/17) and the primary earnings threshold (£155 per week for 2016/17) they get the benefit of notional National Insurance contributions but do not have to pay any actual employee or employer contributions.
However, under RTI they will need to file a submission to HMRC for each pay period that they make a payment to themselves. For this, the company will need to set-up and register with HMRC as an employer and run payroll.