Voluntary National Insurance contributions – should you pay?

Why do we pay National Insurance Contributions?

The payment of National Insurance Contributions enables you to build up your entitlement to your state pension and certain contributory benefits. Different classes of contribution provide different benefit entitlements. There are some instances in which you may need to pay Voluntary National Insurance Contributions.

To pay or not to pay?

When it comes to voluntary contributions this is a query that often raises its head.

You may want to pay voluntary contributions because:

You are close to State Pension age and do not have enough qualifying years to get the full State Pension;

You know you will not be able to get the qualifying years you need to get the full State Pension during your working life;

You are self-employed and do not have to pay Class 2 contributions because you have low profits or live outside the UK, but you want to qualify for some benefits.

Source: https://www.gov.uk/voluntary-national-insurance-contributions 

How you can calculate your contributions

Pay As You Earn (PAYE)

If you are an employed earner you will pay Class 1 contributions when your earnings exceed the lower earnings limit – set at £118 per week (£512 per month, £6,136 per year) for 2019/20.

Self-employed

Should you fall under the self-employed umbrella you will pay Class 2 and Class 4 contributions, but it is the payment of Class 2 contributions only which provide your pension and benefit entitlement.

As a self-employed earner you are liable to pay Class 2 contributions where your earnings from your self-employment exceed the small profits threshold, set at £6,365 for 2019/20.

Should your profits from your self-employment fall below the small profits threshold, you will not be liable to pay Class 2 contributions but you will be entitled to do so voluntarily. For 2019/20, Class 2 contributions are payable at the rate of £3 per week.

Qualifying year

A year is a qualifying year if your contributions have been paid for all 52 weeks of that year. If there are some weeks for which your contributions have not been paid, the year is not a qualifying year. However, you can opt to pay contributions voluntarily to make up the shortfall and turn a non-qualifying year into a qualifying year.

How many qualifying years do I need?

You need 35 qualifying years to receive the full single-tier state pension. This is payable when you reach the state pension age on or after 6 April 2016. To receive a reduced single tier state pension, you need at least 10 qualifying years.

When should I pay voluntary contributions?

Voluntary contributions may be paid to make up the shortfall for a year where Class 1 or Class 2 contributions were not paid for the full 52 weeks or for a year for which there was no liability to either Class 1 or Class 2.

Before paying voluntary contributions, it is necessary to ascertain whether the payment of such contributions would be worthwhile. The starting point is to check your state pension. This can be done online at www.gov.uk/check-state-pension

If you already have 35 qualifying years (or will do by the time state pension age is reached), there is no benefit in paying voluntary contributions.

However, if you have less than 35 years, it may be worthwhile to increase your state pension. Likewise, if by state pension age you will have some qualifying years but less than 10, it may be worthwhile paying sufficient voluntary contributions to secure a minimum pension.

Class 3 contributions

Class 3 contributions are voluntary contributions and can be paid to boost the state pension.

For 2019/20, Class 3 contributions cost £15 per week. Thus, at these rates, to increase the state pension by 1/35th by paying voluntary Class 3 contributions for a year will cost £780.

For 2019/20 the single-tier state pension is £168.60 per week. Therefore at 2019/20 rates, each extra qualifying year (up to 35) is worth £4.82 per week.

Class 3 contributions must normally be paid within six years from the end of the tax year to which they relate – although extended time limits apply in certain cases.

Voluntary Class 2

In the scenario in which you are entitled but not liable to pay Class 2 contributions, paying Class 2 contributions voluntary is a cheaper option, at £3 per week for 2019/20 rather than £15 per week.

Need to know more…

For more information see https://arthurboyd.co.uk/accountancy/ and for any other tax related or money worry queries, contact us today on 028 9032 9255 or by email info@arthurboyd.co.uk