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Voluntary NI & Protecting State Pension and Benefits

When May A Voluntary NI Contribution Be Beneficial?

Entitlement to State Benefits, primarily State Pension, is currently generated from either:

  • Class 1 National Insurance from an Employment / Job – confusingly, no NI is due on weekly earnings of less than £123 (2022/23), and NI is payable at 13.25% on weekly earnings over £190 (2022/23) – between these thresholds you pay NI at 0%, meaning the threshold for benefit entitlement is £123 a week even if there is no actual NI deduction from your payslip.
  • Class 2 National Insurance from Self Employment –  you are exempt from Class 2 if your profits are under £6,725 (2022/23)
  • NI credit as a carer or parent – see see HMRCs guide to Voluntary NI

If you don’t pay National Insurance or get a credit from one of the sources above for each week/month, then a voluntary NI payment may be sensible, for example if:

  • If you are Self Employed – including being a partner in a Partnership – but earning less than the £6,725 threshold, then the easiest and cheapest solution is to pay a voluntary Class 2 contribution – £3.15 week (2022/23)
  • If you are not Self Employed then you would need to pay voluntary Class 3 contributions which are more expensive – £15.85 week (2022/23)

Generally consider Voluntary NI if in any given tax year you haven’t earned at least £6,396 from Employment (52 x Lower Earnings Limit of £123 – 2022-23 rate), or £6,725 from Self Employment.

Its worth noting that for State Pension the earnings from Employment are annualised, so if you don’t earn £123 a week from an Employment, but earn at least £6,396 over the tax year (52 x £120) then the year is a Qualifying Year for State Pension, but it may not qualify you for other state benefits where criteria differ.

It is worth getting a State Pension forecast periodically from HMRC to see how many more years you need to pay for a full pension – whilst there is no exemption from paying NI once you have accrued a full pension, there is no real merit in making voluntary contributions at this stage.

If you need to pay Voluntary Class 2 NI then you can do so by ticking the relevant box on the Self Employed section of your Self Assessment, however you must pay the Class 2 by 31 January after the tax year (the normal Self Assessment payment date) – if you pay late, even by a day, then you lose the right to pay voluntary Class 2 NI.

 

Employed and Self Employed?  NI Considerations

What about if you have both Employed and Self Employed income?

First, it is important you pay National Insurance on one or other source to preserve benefit rights, and in particular State Pension.

If you are paying Class 1 National Insurance on your Employed income of at least £6,396 then you will get your benefit entitlements including State Pension from that Class 1 NI. If your Self Employed income is below the £6,725 Class 2 NI threshold that’s fine, but if it is over then Class 2 and 4 Self Employed NI are still due (as NI is charged separately on each source where there is Employment and Self Employment)

If your Employment income isn’t £6,396 over the course of a tax year,  then if your Self Employed income is over £6,725, Self Employed Class 2 NI is triggered and that will cover you,

If neither source of income is high enough to trigger National Insurance. consider paying, via your Self Assessment, a Voluntary NI Class 2 payment.

There is an annual maximum for National Insurance if you pay at full rate in an Employment and have an additional second Employment or Self Employment but it is extremely complex.

The Self Employed pay both Class 2 and Class 4 NI.  Class 4 cuts in at a higher threshold than Class 2.  All State Benefits are triggered from Class 2.

 

Changes in Spring Statement 2022

In the Spring Statement 2022, as mitigation for the introduction of the Health and Social Care Levy, NI thresholds for Employees and the Self Employed were raised.

  • NI threshold for employees aligned with the Personal Tax Allowance from 6th July 2022.
  • Class 4 NI threshold for Self Employed aligned with the Personal Tax Allowance from 6th July 2022, blended annualised rate for 2002-23 at 3/12ths old level, 9/12ths new level.
  • Class 2 NI threshold aligned with the Class 4 threshold as above, and a zero rate of Class 2 NI between the Small Profits Threshold and the Class 4 NI threshold.
  • It appears the zero rate of Class 2 NI may extend down below the small Small Profits Threshold to £0.  At the time of writing, the day after the Spring Statement, further clarity is awaited on this as draft legislation is not clear.  If this is the case then Voluntary NI for the Self Employed will not be necessary.
  • For 2022-23 Voluntary NI will need reviewing later in the tax year, when the position should be clearer.
  • Spring Statement 2022