What are National Insurance Contributions and why are they important?

*Please note, as of 9 March 2023 the government has extended the voluntary National Insurance deadline to 31 July 2023 to give taxpayers more time to fill gaps in their National Insurance record - get in touch with our team today to discuss this further.

Prior to 5th April 2023, individuals are being encouraged to review their National Insurance (NI) position. The main driver is to ensure that people are aware of their entitlement to receive a state pension, as well as other benefits, such as employment and support allowance.

Every individual has a NI record made up of National Insurance Contributions (NICs) or credits. In order to receive the new full state pension, you need 35 qualifying years of NICs and at least 10 years to qualify for any amount of UK state pension.

Regular reviews of these records are crucial because they give individuals the opportunity to ensure their HMRC records are correct and allow them to make payments towards their NI statements, if necessary, which will plug any gaps in their NI history.

Voluntary National Insurance Contributions are one way to make sure that individuals have enough qualifying years to receive the full state pension, if they have not already met the conditions. For some, payments may increase the amount of state pension they will receive.

These voluntary contributions can currently be made retrospectively to April 2006, however from 6th April 2023, the window will be curtailed to only the previous six years. This means that in the 2023/24 tax year, it will be possible to make contributions going back to the 2017/18 tax year only.

Why do gaps in NIC appear?
There are numerous reasons that a gap may appear in an individual’s NI record – for instance when someone is employed with low earnings, living or working outside the UK or self-employed with small profits, they may not automatically be making NI contributions and may therefore be unaware of gaps in their record.

Class 2 National Insurance was previously collected separately to self-assessment returns. However, this changed a number of years ago and is now reported and paid as part of the tax compliance process. This might mean that people see their income tax reduce and therefore believe that there will be less tax to pay. However, if it's dropping to the point that they are not making NI contributions, they may not understand the potential future impact on their entitlement to a state pension until it’s too late.

Additionally, individuals who have taken career breaks or couples who have decided not to claim child benefit may be at a disadvantage. This could occur where the primary care giver is not working or claiming, and they may therefore be missing out on qualifying years for NI purposes. It is possible to register for child benefit and not claim the values if individuals are concerned about the child benefit charge.

What could individuals consider doing before April?
We would advise that individuals obtain a state pension forecast and review their NI record prior to 5th April where possible. This can be completed online via their personal tax accounts, or statements can be requested.

A review can then be carried out to check any discrepancies between NI paid and the details on the Revenue’s systems. In addition to this, years where NI Credits are missing can also be identified and any shortfalls reviewed. A forecast will show the cost of making voluntary contributions and financial advice should then be obtained to consider any benefits for making these.

However, although reviewing your record before 5th April is preferable, if this deadline is missed, a review of your records will still be beneficial, and individuals should still review their records after this date has passed.

More than just checking your NIC record, there is a case for improving your financial awareness in general. It would be beneficial for all individuals to consider how many more years they have until they have a full state pension. It may seem premature, but investing time into your understanding now will enable you to effectively plan ahead and avoid getting caught out at a time when you should be relaxing in retirement.

Is the advice the same for everyone?
What NIC advice might work for one individual will not be suitable for another. Therefore, a case-by-case approach is required where the appropriate action is decided, dependant on the individuals’ circumstances. For example, for some, making additional contributions may not increase the state pension entitlement at all.

This is why speaking to an appropriate advisor is crucial. Whilst you may be able to calculate the sums yourself, the value that advice from an expert can bring is in the holistic view they can take of your whole financial profile. Their comprehensive knowledge allows them to clearly explore and explain all of the options, by considering any potentially unseen implications and future considerations. All of which will enable you to make an informed decision that will stand the test of time.

If you want to talk through your NI record, state pension entitlement and your options for making NICs contact me or one of the team today. We’d be more than happy to help.

Jessica Long