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Our normal advice to directors of companies is to take a small director’s salary and draw any remaining profit as dividends, this usually results in zero National Insurance (NI) payments. We have had a number of directors query what the effect of a low salary is on the state pension, as this is based on the NI contributions made over your working life.

There are two types of state pension: NIRP (National Insurance Retirement Pension, a fixed state pension) and S2P (State Second Pension, based on NI contributions).

The higher rate band for S2P pension contributions starts at an income of £14,100. Any salary above this, attracts an extra 10% pension credit up to the limit of £40,040. However, for any income level between the Lower Earnings Limit of £5,044 and £14,100, you gain a 40% S2P credit on the £9,056 between these two bands, even if you are at the lower end of the band. This means that a £5,044 salary attracts a £3,622.40 pension credit despite no NI being paid.

The NIRP state pension is currently paid out at £97.65 a week. To qualify for the full NIRP on retirement, you need to have made qualifying NI credits for 30 years. Somewhat depressingly, HMRC state that a working life is 49 years (16 to 65). As with the above type of pension, you get a ‘tick in the box’ if your income is over £5,044, even though no NI is being paid. You do receive a reduced pension if you make less than 30 years contributions, and receive no more if making more than 30.

For self employed sole traders and partners, there are two types of NI paid. These are Class 2, the “stamp” which is currently £2.40 a week and Class 4 which is 8% of taxable profits. The latter gives no pension credit or other benefits and is by all means a tax under another name. Only Class 2 gives pension credits, and only for the NIRP. The Self employed do not get access to the S2P pension.

In summary, it is still advantageous from a tax and NI perspective to be paid as a director of a company, over a self employed person. In addition to this, it is also more beneficial from a pension perspective. Also, a small director’s salary above the LEL of £5,044 will grant you the pension contributions you require whilst costing nothing in NI payments.