As a self-employed person you are to pay an annual contribution of 15% on income earned – the government contributes the other 7.5%.
Self-employed persons are known to pay the 15% social security contributions on a low level of income earned in order to minimise social security contribution expense. Whilst this may result in higher income whilst you are self-employed such an approach will negatively impact your Social Security Pension and hence your pension income during retirement.
If you are born between 1952 and 1961 you have to pay a minimum of 50 annual contributions for 35 years. The amount of the contribution on which you pay your social security contribution in 2015 is capped at a maximum of €17,933. This means that the maximum contribution you will pay in 2016 is €2,690 or €51.73 a week (15% of €17,933) irrespective of the fact that you earn a higher wage from your business.
If you are born on and after 1962, you will pay a minimum of 50 annual contributions for 40 years. The amount of the contribution on which you pay your social security contribution in 2015 is capped at a maximum of €22,138. This means that maximum contribution you will pay in 2016 is €3,321 or €63.86 a week (15% of €22,138) irrespective of the fact that you earn a higher income from your business.
The Maximum Pension Income cap of €22,138 will increase by a formula of 70% wage inflation and 30% inflation every year if you are born on or after 1962. This means that if your income is above the current Maximum Pension Income of €22,138 you will pay a further 15% contribution of the difference between the previous and new, Maximum Pension Income as this changes from year to year.
Example Your Social Security Contribution Payment if you are Self-Employed
In 2016, you earned €30,000 annually from your self-employed business. The Maximum Pension Income caps the social security contribution of 15% you have to pay on €22,138. Your annual social security contribution payment is, €3,321.
In 2016, the maximum cap increased by an annual €389 due to the 70% wage inflation: 30 inflation formula. This means that the Maximum Pension Income now increased from €21,749 to €22,138. Whilst your income in 2016 remained unchanged, the social security contribution you will pay is now 15% of €22,138 – that is €3,321.
Your pension is not calculated on your gross basic wage to a Maximum Pension Income cap but on 2/3 of your gross basic wage to a maximum of the Maximum Pension Income cap. This also accounts for persons born between 1952 and 1961
Do not neglect saving for your retirement over and above your state pension
Do not rely on selling your business to fund your retirement. Without your involvement, your business may be worth less than you think. Many business ventures can also be hard to sell. Instead, think about building a separate pool of retirement savings outside of the state pension.