Voluntary NICs – Should you pay?
The single-tier state pension is payable to individuals who reach state pension age on or after 6 April 2016. Entitlement to the state pension is dependent on having been paid or credited with sufficient National Insurance contributions. Individuals whose contributions record is insufficient for a full state pension can boost their pension by making voluntary contributions.
Is your contributions record sufficient?
To qualify for the full single tier state pension, you need 35 qualifying years. A reduced state pension is paid to individuals who have less than 35 qualifying years but at least ten. Individuals with less than ten qualifying years are not eligible for a state pension. Only the individual’s own contributions are taken into account – contributions by a spouse or civil partner do not provide any pension entitlement.
Check your state pension
In order to decide whether it is necessary to consider paying voluntary National Insurance contributions, you first need to ascertain your state pension entitlement. This can be done by getting a state pension forecast online. The online service allows an individual to:
- check how much state pension they could get — their state pension forecast;
- when they will receive the state pension; and
- how to increase it, if they can.
The service can only be used by individuals who have not already reached state pension age.
Building up qualifying years
The main way in which a person builds up qualifying years for state pension purposes is via the payment of National Insurance contributions. For the year to be a qualifying year, contributions must be paid in respect of all weeks in that tax year.
Where the individual is employed, it is the payment of primary (employee’s) Class 1 National Insurance contributions that provides the means for building up a contributions record. Although no employee Class 1 contributions are payable until earnings reach the primary threshold (set at £166 per week for 2019/20), contributions are deemed to be paid at a notional zero rate once contributions exceed the lower earnings limit (£118 per week for 2019/20). This means that as long as the employee earns at least £118 per week throughout the tax year, the year will be a qualifying one for state pension purposes.
For the self-employed, it is the payment of Class 2 contributions (set at £3 per week for 2019/20) that provides the mechanism for building up entitlement to the state pension and contributory benefits. The self-employed also pay Class 4 contributions on their profits, but this does not confer any pension or benefit entitlement.
Some individuals who are not paying National Insurance contributions may be able to get National Insurance credits. These will help secure qualifying years. Those able to benefit from National Insurance credits include parents and foster parents claiming child benefit for a child under the age of 12, certain people on jobseekers allowance and carers. More information on National Insurance credits can be found on the Gov.uk website.
Topping up with voluntary contributions
Individuals with a shortfall in their contributions record can top it up by paying voluntary (Class 3) National Insurance contributions. Voluntary contributions can be paid to buy additional years or to turn a non-qualifying year into a qualifying year by making voluntary contributions for weeks for which contributions have not been paid or treated as paid.
Class 3 contributions are expensive at £15 per week, so should only be paid where it is beneficial to do so. If a person has, or will have by the time they retire, 35 qualifying years, there is nothing to be gained by paying voluntary contributions. If an individual has slightly less than ten qualifying years, paying voluntary contributions to increase their qualifying years to ten may be worthwhile as this will secure a minimum state pension.
At 2019/20 rates, it will cost £700 (52 weeks @ £15 per week) to buy an additional year – at 2019/20 rates this will increase the state pension by £4.82 a week (£57.04 a year). Thus, a person needs to live at least 12 years and 3 months to recoup the cost of each year of voluntary contributions.
Class 3 contributions must be paid within six years from the end of the tax year to which they relate. Extended time limits apply to certain years.
Class 2 rather than Class 3
The self-employed are only liable to pay Class 2 contributions if their profits exceed the small profits threshold, set at £6,365 for 2019/20. Where profits from self-employment are less than this, Class 2 contributions can be paid voluntarily. If an individual has a shortfall in their contributions record and is eligible but not required to pay Class 2 contributions, at £3 per week for 2019/20, this offers a much cheaper option of plugging a pension shortfall than paying Class 3 contributions of £15 per week.
Review your pension forecast and ascertain whether payment of voluntary contributions is worthwhile.