What is it and why is it important
National insurance is the part of the UK Tax Authority, Her Majesty’s Revenue and Customs (HMRC) which is directly relevant to State Benefits. Those can be Universal Credit, Maternity Pay or Disability Benefit and it is the main taxation which most directly goes to the National Health Service.
However for the purposes of this (and future editions of this) blog, we are most concerned with the use of National Insurance contributions which affect the level of your UK state pension.
Usually contributions are made on a PAYE basis similar to that of Income Tax in the UK. To qualify for a full UK pension you need to have made 35 years full contributions and that would give you around £175 per week at age 67 based on current pension ages and pension amounts.
That accumulates to over £9000 per year, which is not insubstantial and, as financial advisors, our usual advice is to contribute to NI as much as you can as it makes complete financial sense.
The way it works
Now National Insurance contributions – for British citizens including expats – are paid according to the type of CLASS of contribution that you are liable to make. Which CLASS is relevant to you can be the first complicated calculation. There are 4 CLASSES but we focus on 3 CLASSES which are relevant to most expats, as CLASS 1 is deducted as part of your PAYE income from a UK employer.
CLASS 3 is for employed people outside the UK and ALSO (crucially) for those wishing to repay MISSED CONTRIBUTIONS (we will come back to this later).
It seems that CLASS 2 and CLASS 4 is for those self-employed. CLASS 2 for those making a small profit and CLASS 4 for those making a larger profit. The hurdle rate is low at less than £10,000 per year to exit CLASS 2 and ‘qualify’ for CLASS 4.
The current rates for the mentioned classes are as follows:
- CLASS 2 – £3.05 per week
- CLASS 3 – £15.30 per week
- CLASS 4 – 9% on profits between £9501 and £50,000 per year and 2% on profits above 50,001
How to qualify
As mentioned above, you need to make contributions of 35 years of National Insurance to qualify for a FULL UK Pension, worth currently around £175 per week.
If you are close to retirement and, for whatever reason such as you have been an expat for a long time, you cannot make 35 years of contributions then you do qualify for a reduced pension as long as you have 10 years of NI contributions.
You can actually back date contributions for more than 10 years so almost all of you with a UK NI number reading this COULD qualify for a UK pension.
Bluntly put, having saved 10 years of NI contributions that qualifies you for a UK state pension of £50 per week, that is calculated by 10/35 of £175. For every year of NI contributions you can make, an extra £5 is added to the weekly pension.
A financial advisor would work out that you can save for 35 years NI contributions and if you live past 71 years old, you are probably in profit in the whole exercise. Remember that this is a State Pension and when you die there is NOTHING passed to your spouse or to any other relatives. Once you die, its gone. However we still encourage people to save as it is really cost effective and very cheap.
How does it affect me
Lets return to the CLASSES and how to achieve the 35 years.
Most expats have stopped paying NI when they leave the UK. There are some circumstances where this is not true – for example diplomatic staff or those seconded overseas on a short term contract. But lets leave those cases aside.
For those wishing to contribute and reach the full 35 years of pensions savings, there are a number of factors to consider. Namely that you can ‘back-pay’ for missed contributions and you can obviously pay in real time on a weekly basis going forward.
In addition this is also relevant to NON-UK citizens who have spent a lengthy time working in the UK. For example, recently there has been a trend for EU nationals, particularly from the Eastern parts of the bloc to return back ‘home’ after spending a long time working and living in the UK. Many of these people have National Insurance numbers and most of those have multiple years of NI contributions. These can be converted into local pensions or contributions made towards a UK state pension, and this applies EVEN POST-BREXIT!
This is very straightforward, as recent changes have extended the number of years for MOST PEOPLE so that it is possible to back pay up to 16 years of missed contributions. This covered by CLASS 3 voluntary contributions so £15.30 approximately per week multiplied by 52 multiplied by 16 years would give you a contribution of almost £12,730 to make. Remember this amount is almost HALF the total amount required to contribute to fulfil the 35 years for a full pension of £9100 PER YEAR for LIFE. You can see its not a bad deal!
Contributing Going Forward
This is a little more complicated as it depends on individual work circumstances. As mentioned above, we tend to ignore CLASS 1 contributions as they are generally for UK resident employees. If you are employed outside the UK, then CLASS 3 is relevant here. For many people who are self-employed, CLASS 4 will be the basis for NI calculations unless they do not make a serious profit, in which case they may be able to contribute as little as £3.05 per week to qualify for a full UK pension – an absolute bargain!
I intend to continue to add to this subject over time. It is an incredibly complicated and opaque system, so please send me your questions and I will try to answer them by further additions to this blog subject. Please do get in touch!