The payment of National Insurance contributions is linked to entitlement to the state pension. If sufficient National Insurance contributions of the right type are paid for a tax year, that year counts as a qualifying year for state pension and benefit purposes. A person may also secure a qualifying year if they are awarded National Insurance credits for that year. This may be because they have low earnings or are in receipt of certain benefits, such as child benefit or carer’s allowance.
People reaching state pension age on or after 6 April 2016 need 35 qualifying years for a full state pension and at least ten qualifying years to receive a reduced state pension.
Different classes of NIC
Employed and self-employed earners pay different classes of contribution. Employed earners pay Class 1 contributions if their earnings exceed the primary threshold. For 2024/25 this is set at £242 per week, £1,048 per month and £12,570 per year. However, where their earnings are between the lower earnings limit (set at £123 per week, £533 per month and £6,396 per year) and the primary threshold, the employee is treated as if they had paid National Insurance contributions, albeit it at a zero cost. Where earnings in the tax year are equal to 52 times the weekly lower earnings limit (so, £6,396 for 2024/25), the earner secures a qualifying year for state pension purposes. Employed earners whose earnings are below this level will not build up state pension entitlement via their earnings. Contributions payable by the employer (secondary Class 1, Class 1A and Class 1B) do not provide any pension or benefit rights for employees.
Self-employed earners now build up entitlement through the payment of Class 4 contributions, in respect of which a liability arises where their profits from self-employment are more than the lower profits limit (set at £12,570 for 2024/25). Where profits are between the small profits threshold (set at £6,725 for 2024/25) and the lower profits limit, the self-employed earner receives a National Insurance credit which provides them with a qualifying year.
For 2023/24 and earlier tax years, self-employed earners built up their state pension entitlement through the payment of Class 2 contributions; for 2023/24 and earlier tax years, the payment of Class 4 contributions did not provide any pension or benefit rights.
Self-employed earners whose profits are below the small profits threshold can pay voluntary Class 2 contributions to preserve their state pension entitlement.
Voluntary Class 3 contributions
Individuals who will not have 35 qualifying years by the time that they reach state pension age may want to pay voluntary Class 3 contributions in order to boost their state pension. However, before paying the contributions, it is important to check that doing so will be beneficial. An individual can check their National Insurance record and state pension forecast online on the Gov.uk website or via the HMRC app. Making voluntary contributions is only worthwhile if a person will not otherwise have 35 qualifying years when they reach state pension age and if, after making the contributions, they will have at least ten qualifying years. This is the minimum needed for a reduced state pension. An individual may also be able to pay voluntary contributions if they have reached state pension age and want to plug gaps in their record to boost their state pension.
Class 3 contributions for 2024/25 are payable at the rate of £17.45 per week. Class 3 contributions must normally be paid no later than six years from the end of the tax year to which they relate (so by 5 April 2031 for 2024/25 contributions). Where contributions are paid after the end of the tax year to which they relate, they are usually paid at the current rate where this is higher. Individuals who have gaps in their National Insurance record between 6 April 2006 and 5 April 2016 can make voluntary contributions at the 2022/23 rate of £15.85 per week until 5 April 2025 to plug those gaps.
Self-employed earners with profits below the small profits threshold can pay voluntary Class 2 contributions instead of voluntary Class 3. This is a much cheaper option (£3.45 per week for 2024/25 rather than £17.45 per week). They can also plug gaps in their record between 6 April 2006 and 5 April 2016 by making contributions at the 2022/23 Class 2 rate of £3.15 per week by 5 April 2025.
