The government has this morning confirmed the deadline for filling gaps in your National Insurance (NI) contribution record all the way back to 2006 has been extended to 31 July 2023. The previous deadline was 5 April 2023, but concerns had been raised people were struggling to get through to jammed HMRC phonelines.
You can read the full government announcement here: Taxpayers given more time for voluntary National Insurance contributions - GOV.UK (www.gov.uk) and the written ministerial statement here: Written statements - Written questions, answers and statements - UK Parliament
Tom Selby, head of retirement policy at AJ Bell, comments:
“Extending the deadline for Brits to pay voluntary National Insurance contributions to boost their state pension entitlement is a pragmatic and welcome step by the government.
“Thousands of people taking advantage of transitional measures established as part of reforms introduced in 2016 could increase their state pension income by hundreds of pounds a year. But with the original deadline less than a month away, a surge in the number of calls to HMRC led to the real risk of people being caught in a telephone logjam and missing out as a result.
“That would have been a PR disaster for the DWP and inevitably have led to claims for compensation. Today’s announcement should help ease the strain on the government’s phone lines and will hopefully provide sufficient leeway to ensure anyone who wants to pay voluntary NI going back to 2006 is able to do so.
“If you are considering paying voluntary NI it is vital you think carefully about the decision, as while it will be a savvy move for some, it will not benefit everyone. Before parting with any cash, contact the government’s Future Pension Centre, who should be able to tell you whether or not paying voluntary NI will increase your state pension entitlement.”
A quick guide to voluntary NI contributions
A £275 annual income boost for just £824…
“While some of the jargon and complexity involved might be off-putting, boosting your state pension entitlement can deliver significant financial benefits.
“You usually need to pay voluntary ‘Class 3’ NI contributions to top up your state pension entitlement. It costs £15.85 to buy one week’s worth of Class 3 NI, or £824.20 per year.
“Based on someone increasing their entitlement to the ‘new’ state pension (worth £185.15 per week in 2022/23), that could result in an income boost of £5.29 per week or £275.08 per year.
“What’s more, that income will be protected by the ‘triple-lock’, meaning it rises every year by the highest of average earnings, inflation or 2.5%. In April this year, the state pension will increase by a whopping 10.1%, in line with inflation in September 2022.
“Broadly speaking, anyone who increases their state pension on these terms will need to live 3-4 years in order to be in ‘profit’ from the deal.
“Given average life expectancy at state pension age is around nine years for men and 11 years for women – with a decent chance of living into your 90s – those in good health who can boost their state pension could benefit handsomely by doing so.
“However, in some circumstances paying voluntary NI contributions will NOT boost your state pension (see examples below).”
Considerations for those thinking of paying voluntary NI
“Most obviously, the younger you are, the more likely you are to naturally build up the 35-year NI record needed to entitle you to the full state pension. In these circumstances, buying extra NI risks being a complete waste of money.
“If you have had gaps in employment due to caring for children or elderly relatives, you might be entitled to NI ‘credits’. These credits give you exactly the same entitlement to the state pension as voluntary NI contributions – but at zero cost.
“In addition, anyone who previously ‘contracted-out’ of the state pension under the old system (which existed before 6 April 2016) might also be entitled to less than the full state pension – even if they have a 35-year NI record.
“Contracting out (which no longer exists) just meant you paid lower NI and in return didn’t receive entitlement to the state second pension (the state pension used to be made up of two parts – the basic part and the state second pension, which was previously called ‘SERPS’).
“If you have previously contracted out, a deduction will be made to your state pension entitlement. If you aren’t entitled to the full state pension as a result of being contracted out, you can buy extra NI years to make up the gap.
“However, not everyone who was contracted-out will benefit from buying extra NI years. This is quite complicated and will depend on what you’d have been entitled to under the old system.”
Income tax considerations
“It’s also important to remember that your state pension will count towards your income tax bill. That means that by increasing the value of your state pension, you could also push yourself into a higher income tax bracket.
“Where this is the case, the benefit of buying extra state pension years will effectively be lower and so it will take a bit longer to ‘break even’.
“In many cases it will still be worthwhile to buy extra NI years, but you should take the time to fully think through the financial implications, ideally with the help of a regulated financial adviser.”
Useful resources
Full details of the Future Pension Centre are available here: Contact the Future Pension Centre - GOV.UK (www.gov.uk)
You can check your state pension forecast here: Check your State Pension forecast - GOV.UK (www.gov.uk)
If having consulted the Future Pension Centre you decide you want to pay voluntary NI, details for contacting HMRC are here: National Insurance: general enquiries - GOV.UK (www.gov.uk)
