Maintaining your NIC contributions Covid-19
The Covid-19 pandemic has meant that many people will suffer a reduction in income in 2020/21. Not all individuals are eligible for support under the Coronavirus Job Retention Scheme or the Self-Employment Income Support scheme, and those who are eligible for the grants will not generally receive their full pay.
Where income drops this may have an effect on the National Insurance contributions payable and the individual’s contributions record, which in turn determines their entitlement to the state pension and contributory benefits. A person reaching state pension age on or after 6 April 2016 needs 35 qualifying years to receive the full single tier state pension.
Employees build up their entitlement via the payment of primary Class 1 National Insurance contributions. For a year to be a qualifying year, the employee must have been paid or credited with National Insurance on earnings equal to 52 times the lower earnings limit. For 2020/21, the lower earnings limit is £120 per week – 52 times this is £6,240. Where earnings are between the lower earnings limit and the primary threshold (set at £189 per week for 2020/21) contributions are payable at a notional zero rate, so the employee gets the benefit but does not have to pay anything.
Missed weeks need not be a problem in themselves, as long as contributions are paid or deemed to have been paid on earnings of £6,240 for 2020/21. However, where the employee earns just above the lower earnings limit, being furloughed or taking unpaid leave can cause earnings on which contributions are paid to drop below the magic level, with the result that the year is not a qualifying year.
Where a person is out of work for a period, depending on whether they receive benefits and what benefits they receive, they may get Class 1 National Insurance credits, which will serve to protect the year. Credits are also paid to those claiming child benefit.
Although the self-employed pay both Class 2 and Class 4 National Insurance contributions, it is the payment of Class 2 contributions (at £3.05 per week for 2020/21) that provides state pension and benefit entitlements. Where earnings are below the small profits level, set at £6,475, the self-employed earner is entitled but not liable to pay Class 2 contributions. If the earner opts not to pay Class 2 contributions (and does not pay sufficient Class 1 or receive NIC credits), the year will not be a qualifying year.
To pay voluntarily or not to pay
If a person already has 35 qualifying years or is likely to do so by the time that they reach state pension age, missing a year will not adversely affect their state pension entitlement. However, if they have less than 35 years (and will be able to reach the minimum 10 years needed for a reduced state pension by the time that they reach state pension age) making voluntary contributions can be worthwhile.
Those with earnings from self-employment of less than the small profits threshold (£6,475 for 2020/21) can pay Class 2 contributions voluntarily. At only £3.05 per week for 2020/21 this is a cheap and worthwhile option.
Where there are no earnings from self-employment, paying voluntary contributions means paying Class 3 contributions at £15.30 per week for 2020/21.