state pension, accredited years and 40% taxpayer

singhini

I'm trying to get my head around the state pension and if there is any advantage in being a 40% tax payer / 2% additional NI payer.

If you have two employees and one is a 20% tax payer and the other is a 40% tax payer; after lets say 20 years of employment will they both have 20 years of accredited pension contributions or does the person paying 40% + 2% additional NI tax end up with more pension credits (for instance lets say 22 years)?

Ive worked for about 20 years (with different companies) and have at times been both a 20% & 40% tax payer. I wrote to the DWP to find out what my state pension was and they wrote back saying something like the state pension currently is £164 and based on my current contributions I am projected to get £120 but if I continue to make 7 more years worth of contributions I will get the full £164.
but 20 years plus another 7 is 27 years of working contribution and so im guessing there must have been a benefit to being a 40% tax payer i.e. the additional 2% NI contributions over the years must have ment I could potentially get the full state pension after 27 years of contributions and not 35 years?

Comments welcome

zagfles

It has nothing whatsoever to do with tax bands. It's far more complicated than that.

p00hsticks

zagfles wrote: »

It has nothing whatsoever to do with tax bands. It's far more complicated than that.

In the past it's been affected by whether you were 'contracted in' (to the additional state pension / SERPS) or 'contracted out' (paying a lower rate of NI and contributing to some sort of private pension scheme).

This will have influenced the 'starting amount' calculated for you personally when the new State Pension (nSP) was introduced on April 6th 2016. This did away with the idea of being contracted in or out, and the starting amount calculation has been discussed numerous times previously on this boards.

Going forward from then, every full year of NI simply earns you 1/35th of the maximum nSP amount (currently £168.60 a week), so all yo need to worry about is that your contribution each year is sufficient to count.

Depending on your personal 'starting amount' you many end up needing more or less than 35 years before you reach the new maximum amount.

bowlhead99

singhini wrote: »

but 20 years plus another 7 is 27 years of working contribution and so im guessing there must have been a benefit to being a 40% tax payer i.e. the additional 2% NI contributions over the years must have ment I could potentially get the full state pension after 27 years of contributions and not 35 years?

You are right, there was (in the past) a benefit to being a high earner and paying high amounts of NI. Essentially there was a basic state pension which everyone got (quite a bit lower than today's £160-odd) , and a state earnings-related second pension which depended on how much you were earning and paying in.

Up until 2002 this was called 'state earnings related pension scheme' (serps) and later 'state second pension' (s2p). As the other posters mentioned, it was possible to be 'contracted out' of those schemes and contribute to a different private scheme instead. But essentially, as a high earner under these schemes paying large amounts of cash to the government through your NI, you might have been on track to end up with quite a bit more than £160 when your basic pension and second pension were added together.

Then as p00sticks said, in 2016 they did away with any of this 'you can get more state pension if you earn and pay more', and just increased the basic pension to £160-odd; they said that *going forward* from that point you can add 1/35th of that amount every year until you hit that level. But to make sure you didn't lose out if you had already built up a high amount of pension under the old system, they did a calculation to give you a 'starting amount'.

Your situation is just like my own situation. Through earning more than the average, we had both been building up decent amounts of earnings- related pension and if we had been allowed to keep going we would have reached some level quite a bit higher than £160. When we got flipped over to the new system in 2016, we had quite a high starting amount, compared to a low earner. You might already have got to £100-120 under the old system at that point. So now going forwards, adding 1/35th of £160-odd per year, it won't take many more years to get to the £160 level which is the new standard level.

In my case I will only be in my mid to late 40s by the time I get to the new standard £160-odd level, so it will have taken me quite a bit less than 35 years to get there. From then on, my state pension won't increase any further (other than with inflation) no matter whether I eventually have 30 years or 40 years or 50 years of paying NI.

So under the old system, paying high levels of NI earned you a bigger pension, but under the new system, your historic high payments will just allow you to reach the new standard pension faster. For someone entering the workforce today, it doesn't matter if they pay high levels of NI or low levels of NI, they'll simply get 1/35th of the standard amount per year and won't be able to get their pension faster or get more pension by being a high earner.

molerat

Under the pre 2016 system you could receive up to £305.61 state pension per week, £129.20 basic and £176.41 additional.

singhini

thank-you to all who commented, im a lot clearer now. based on your comments I was able to find a couple of helpful websites that back up the comments on here
https://www.nidirect.gov.uk/articles/voluntary-national-insurance-contributions

http://www.rights4seniors.net/content/national-insurance-contributions