Source: accounting web
HMRC is allowing affected self-employed people to fill missing qualifying years on their national insurance record. ATT technical officer Senga Prior explains when voluntary Class 2 contributions may be worthwhile.
Class 2 national insurance contributions (NIC) provide the self-employed with access to certain state benefits and allow them to accrue qualifying years for state pension.
The new state pension commenced on 6 April 2016 and is paid to those who reach state pension age after that date: men born on or after 6 April 1951 and women born on or after 6 April 1953. To receive the full new state pension, most individuals require 35 qualifying years. At least 10 qualifying years are required to receive any new state pension at all.
The collection of Class 2 NIC has changed several times over the years since national insurance was introduced in 1911.
Initially, contributions were paid by employees only, with employers buying stamps from the Post Office and sticking them on a card. The card was proof of entitlement to benefits and was given to the employee when they left the employment.
To this day, NIC is still referred to by some as ‘paying their stamp’ and losing a job as ‘being given your cards’. In 1975, NIC became earnings-based rather than a flat rate charge. However, Class 2 has remained as a flat rate amount.
Before April 2015, Class 2 NIC was collected either by an annual payment by cheque or a quarterly standing order. From 2015/16, it was collected via a self-assessment tax return where profits were above the small profits threshold (SPT). If profits were below the SPT, entitlements could be protected by paying voluntary Class 2 NIC, as long as payment was received by the 31 January payment deadline.
From the 2024/25 tax year, self-employed individuals are no longer required to pay Class 2 NIC. Those earning above the SPT continue to qualify for relevant state benefits and receive a qualifying year for state pension entitlement. Those below the SPT can still protect their entitlements by paying voluntary Class 2 NIC via self assessment.
Missing qualifying years
HMRC has recently begun writing to certain individuals who were self-employed and who have missing qualifying years from April 2015 to April 2024.
The gaps may have occurred because an individual commenced self-employment but did not complete a CWF1 form, perhaps because they already had a unique taxpayer reference (UTR) or completed a tax return for another reason.
As HMRC’s tax systems and national insurance records were not fully linked, the completion of the sole trade or partnership pages in a tax return without completing a CWF1 meant that the national insurance office was not aware that the individual needed to pay Class 2 NIC.
Another situation could have arisen where, even if correctly registered for Class 2 NIC, the payment for voluntary Class 2 NIC was received after the 31 January deadline.
The contributions were usually left on the individual’s self assessment account as a credit, or refunded with any other repayment requested.
Another example is where a payment was made by the 31 January deadline, but there was an outstanding tax liability, as any payments would have been offset against this in priority to any Class 2 contributions.
HMRC estimates 800,000 taxpayers may have gaps in their record due to this issue, with 160,000 of these aged above or within two years of state pension age.
The HMRC letter sent to affected individuals will not be a demand for payment; however, they will be allowed to make voluntary contributions. Normally, voluntary NIC can only be paid for the previous six tax years. HMRC’s exercise effectively relaxes this restriction for affected individuals, allowing gaps dating back to 2015/16 to be addressed.
Those nearest state pension age will receive their letters first, with others receiving theirs over the coming months. However, taxpayers do not necessarily need to wait for a letter from HMRC before reviewing their national insurance record and state pension forecast.
Myrtle Lloyd, HMRC’s chief customer officer, said, “There is no need for people to do anything now. We have identified those affected and are contacting them to reassure that processes have been set up to remedy the situation now and for the future. We want to make sure no one misses out on their state pension entitlements.”
What should affected taxpayers or their agents do?
The issue of a letter by HMRC does not necessarily mean that there is a shortfall, so the first step is to check whether the additional qualifying years are actually required. It may be that the individual already has sufficient years to maximise their state pension, perhaps due to other previous self-employment or because they have been in employment with qualifying years in the past, or have moved to steady employment and expect to have sufficient qualifying years in the future. Any additional payments in those situations would not increase the state pension amount.
The easiest and quickest way to check qualifying years is through the individual’s personal tax account (PTA), following the link ‘National Insurance and State Pension’. This will take them to an estimate of their state pension based on current rates and qualifying years. A further link will take them to a breakdown of their NIC history.
Unfortunately, agents do not have access to this information but can assist their clients in registering for a PTA and finding the relevant information. Agents should not use clients’ login details to access PTAs. Alternatively, form BR19 can be completed and posted to the Newcastle Pension Centre, or the individual can call the Department for Work and Pensions Future Pension Service on 0800 731 0175. Any forecast will be sent to the individual and not their agent.
It is also worth checking the NIC history to ensure periods of national insurance credits have been applied. Most credits should be applied automatically, but the history should still be checked, especially if the individual opted out of child benefit to avoid their household being affected by the high-income child benefit charge.
From April 2027, it will be possible to claim for missing credits, due to opting out of child benefit, to be applied to the national insurance record, and claims can be backdated to 2013. This will increase the number of qualifying years. Originally intended to launch in April 2026, HMRC has stated that anyone affected by the delay because they are already over state pension age or will reach state pension age before 6 April 2027 can apply early to have the credits allocated.
The state pension forecast will also assist clients going forward when having to make the decision on whether or not to make a voluntary Class 2 contribution in a year of low profits. It is worth bearing in mind that state pension cannot be increased beyond the maximum amount based on 35 qualifying years.
Example
Sarah became self-employed in 2017/18 but failed to submit a CWF1 because she already had a UTR from a previous letting business. Although she submitted tax returns, no Class 2 NIC liability was created. HMRC’s review has identified missing qualifying years, allowing Sarah to make voluntary contributions and improve her future state pension entitlement.
Sarah checks her state pension forecast using her PTA and realises that she is a few qualifying years short of the 35 years required. As she is nearing state pension age, she decides to make up the shortfall and contacts National Insurance Enquiries as explained in the letter to obtain a payment reference number and then pays the Class 2 NIC for the required number of missing years.
Conclusion
Although compulsory Class 2 contributions have largely disappeared from many self-employed tax computations, they remain highly relevant from a state pension perspective.
Under the provisions of the Financial Services and Markets Act 2000, most tax agents will not be able to provide pensions advice other than advising on the tax consequences. They can, however, help clients to obtain a pension forecast, understand why gaps may have occurred, and explain the next steps to take.
Class 2 NIC may provide a means to enhance pension entitlement for a very modest cost. For many individuals, a voluntary Class 2 contribution may cost only a few pounds per week, yet a qualifying year can increase state pension entitlement by around 1/35 of the full state pension. Depending on life expectancy, the value of the additional pension received may significantly exceed the cost of the contribution.