Are Voluntary National Insurance Contributions Worth The Money?

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In the UK, every new year, financial writers remind their readers to organise their finances before the end of the financial year. For some people, this may include deciding whether or not to pay voluntary National Insurance contributions. If you are one of these people, here is a quick guide to what you need to know.

The basics of National Insurance

For all practical purposes, National Insurance is a tax. As such, your liability for it, if any, is determined by your income. National Insurance is, however, a unique tax. It’s the only tax where payments are directly linked to benefits.

In particular, you need a minimum level of National Insurance contributions to qualify for the state pension at all. Furthermore, the amount of state pension you receive is tied to the number of years for which you have paid National Insurance.

If you earn above a certain income from work (employed or self-employed), you will be liable for National Insurance. If you are an employee, your contributions will be paid automatically for you by your employer. If you are self-employed, you will pay them with your tax return. If you are in receipt of certain benefits, you will be eligible for National Insurance credits.

If none of the above categories applies to you, you can still choose to pay voluntary national insurance contributions. Under current rules, most people can fill in national insurance gaps for the previous 6 financial years. Some people may be able to fill in gaps from further back.

The benefits of paying voluntary National Insurance contributions

Paying voluntary National Insurance contributions may qualify you for certain benefits. It may also be necessary to ensure that you qualify for a state pension. Even if it isn’t, it may increase the amount you receive in retirement.

The drawbacks of paying voluntary National Insurance contributions

If you pay voluntary National Insurance contributions, you are making an irreversible payment in exchange for a benefit you may not receive. If you do receive it, it may not have the significance you expected. This is a very real consideration for the state pension given the cost of financing it.

For example, the Institute of Economic Affairs published a paper called “Income From Work”. In this, it made a series of recommendations relating to retirement savings, including the state pension.

One of its recommendations was that the state pension should be means-tested. Implementing this proposal would be controversial, to put it mildly. Other suggestions, however, are effectively already being implemented. For example, the IEA recommended raising the qualifying age for a statement pension. The Treasury is doing just that.

The Treasury also has the option to cancel the triple lock. This is the scheme that ensures the state pension rises by the highest of inflation, average earnings or 2.5%. If it did this, it could quietly erode the value of the state pension. This would cut its cost without the fanfare of means testing it (or raising the qualifying age even more).

The alternatives to paying voluntary National Insurance contributions

There are many alternatives to paying voluntary National Insurance contributions. The most obvious ones are increasing your workplace/private pension contributions and/or making contributions to a Lifetime ISA (LISA). Really, you could look at any sort of investment as an alternative to paying voluntary National Insurance contributions.

If you’re carrying debt, especially high-interest debt, then you should definitely consider paying extra towards this. For younger adults, this is very likely to be far more beneficial than paying voluntary National Insurance contributions.

For older adults, if you’ve already qualified for the state pension, then you should probably focus on paying down debts. If you haven’t, then you should make it a priority to see a financial professional and set out a clear path forward. Debt in retirement is becoming increasingly common. It does, however, need to be very carefully managed.

For financial advice, please get in touch

An ISA is a medium to long term investment, which aims to increase the value of the money you invest for growth or income or both. The value of your investments and any income from them can fall as well as rise. You may not get back the amount you invested.

HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.

Tax concessions are not guaranteed and may change in the future. Tax free means the investor pays no tax.”



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