MICHAEL Proudfoot, Kendal-based partner of Lonsdale & Partners Chartered Account-ants, reviews the new state pension, in his latest article for Business Gazette.

The new Second State Pension (S2P) replaced the State Earnings Related Pension Scheme (SERPS) in April 2002. Virtually all employees earning at least £3,900 a year will be affected. Although middle and high earners will eventually be worse off under S2P, it will enhance the state pensions of employees who earn between £3,900 and £10,800 a year.

Employees in this pay range will generally be treated as if their earnings were equal to the S2P lower earnings threshold of £10,800.

Rewarding your spouse tax-efficiently

The introduction of S2P therefore increases the benefits of business owners paying a modest salary to their spouses. For example, where the salary paid does not exceed the personal allowance (£4,615 for 2002/03), it will not be liable for national insurance contributions (NICs) and may well also be tax-free.

Notwithstanding the modest salary, such employees are able to have a personal pension. Since April 2001, an employer can contribute £3,600 (gross) per annum to an employee's stakeholder or personal pension irrespective of the employee's (modest) earnings.

The payment is free of both tax and NICs and so is often more efficient than paying the employee additional salary out of which they fund their own pension contributions.

The salary package for the spouse, including any pension contributions, needs to be commercially justified. Otherwise there is a danger that the payments will not be tax-deductible in the business.

The self-employed

A government think-tank has proposed that the self-employed should contribute to S2P. Currently the self-employed pay less national insurance than employees but only qualify for the basic state pension on retirement. However, any such change is likely to take several years to implement.

February 13, 2003 10:00