Paying Voluntary National Insurance Contributions: Which Class?

The payment of National Insurance contributions is the mechanism by which individuals build up entitlement to the state pension and certain contributory benefits. 

The employed build up their contribution record via the payment of Class 1 National Insurance contributions. The self-employed currently pay Class 2 contributions at a flat rate and Class 4 contributions on their profits, but it is the payment of Class 2 contributions which is responsible for providing state pension and benefit entitlement. However, this will change from April 2018, when Class 2 contributions are abolished and the role of providing pension and benefit entitlement for the self-employed will be transferred to Class 4 contributions.

Entitlement to a full state pension is contingent of having paid, or been credited with, sufficient National Insurance contributions. The number of qualifying years needed for a full state pension depends on the date on which state pension age is reached.

An individual reaching state pension age on or after 6 April 2016 needs 35 qualifying years for a full single-tier state pension. A minimum of ten qualifying years is needed to receive a minimum single-tier pension. A person who reached state pension age before 6 April 2016 will receive the basic state pension and, where relevant, the earnings-related second state pension. Where state pension age was reached on or after 6 April 2010 and before 6 April 2016, an individual needed 30 qualifying years for a full basic state pension.

A person who does not have (or will not have by the time that state pension age is reached) sufficient qualifying years for a full state pension can boost their pension by paying voluntary contributions to `buy’ additional years. Class 3 contributions are the main Class of voluntary contributions, but certain people may also have the option to pay a Class 3A contribution, or to pay Class 2 contributions voluntarily.

Class 3 contributions 

Class 3 contributions are the main class of voluntary contribution, which can be paid by person aged 16 and over who satisfy conditions as to residence and presence in Great Britain or Northern Ireland. However, at £14.10 per week the payment of Class 3 contributions is not cheap. Class 3 contributions must normally be paid within five years of the end of the tax year for which the contributions are paid. 

Before paying Class 3 contributions it is advisable to obtain a pension forecast to check payment of Class 3 contributions is worthwhile.

Class 3A contributions can be paid for a limited time by people who reached state pension age before 6 April 2016 in order to boost their basic state pension. The payment window closes on 5 April 2017 (although may be extended slightly in certain limited cases). 

Each Class 3A contribution increases the basic state pension by £1 per week. The amount of a Class 3A contribution depends on the age of the individual at the time that the contribution was paid. The maximum amount by which the basic state pension can be increased as a result of the payment of Class 3A contributions is £25 per week. For a person aged 80, the costs of a Class 3A contribution is £544. Thus an 80-year-old would need to pay a Class 3A contribution of £13,600 to increase their basic state pension by £25 per week.

Undertake a cost/benefit analysis to decide whether payment of a Class 3A contribution is worthwhile, and compare the return with that from alternative investments. At age 80, a person would have to live 10.5 years to break even on a Class 3A contribution.

Class 2 contributions are flat rate weekly contributions payable by the self-employed whose earnings are more than the small profits threshold (£5,965 for 2016/17). Individuals who have earnings from self-employment of less than £5,965 are eligible but not required to pay Class 2 contributions, but can choose to do so voluntarily to preserve their contributions record.

Where a person is eligible to pay Class 2 contributions voluntarily, at £2.80 a week (2016/17 rate) this is considerably cheaper than paying Class 3 contributions of £14.10 a week – an annual saving of £587.60.

The opportunity to pay Class 2 contributions voluntarily comes to an end of 5 April 2018, when Class 2 contributions are abolished.

Obtain a pension forecast to ascertain if it would be worthwhile paying voluntary contributions to boost your state pension entitlement. If so, decide which Classes of contribution you are eligible to pay and which best meets your needs.