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Many people overlook the importance of national insurance contributions (NIC) and the effect this can have on their ability to qualify for state pension and benefits. Many are also unaware that a number of changes are being made in respect of the administration and collection of NIC. If you would like further information regarding any aspect of NIC please contact us.
State Retirement Pension
The state retirement age is increasing and the age at which you will qualify for state pension may depend on your date of birth.
State Pension age is 65 for men born before 6 April 1959 and 60 for women born before 6 April 1950. However, this will gradually increase to 65 for women between 2010 and 2020.
Your NIC contributions can affect the level of state pension you receive on retirement and your ability to claim certain state benefits. If you haven't made sufficient NIC contributions in a year, perhaps because you were taking a career break to raise family or because you were working part time hourse, it may be possible to ‘top up’ your NIC qualifying years. For example, you may be able to pay voluntary Class 3 NIC. You may also qualify for NIC credits, for instance if you were:
- unable to work due to illness,
- claiming certain benefits (eg Employment and Support Allowance or Carer's
Allowance, Child Benefit for a child under 12)
- doing jury service
- getting Statutory Adoption Pay, Statutory Maternity Pay, Statutory Sick Pay,
Maternity Allowance or Working Tax Credit
- caring for a child or for someone who is sick or disabled.
It is possible to obtain a pension forecast from HMRC in order to quantify your entitlement to state pension, identify any shortfall in NIC and to assist with planning for your retirement.
You may also wish to contribute to a private pension or consider alternative forms of investment to provide additonal funds for your retirement - particularly if you wish to travel or otherwise enjoy your retirement!
Class 2 NIC
Most self employed individuals are liable to pay Class 2 NIC. The contributions are a flat rate of £2.50 per week (£130pa) for 2011/12.
Historically Class 2 NIC has been paid for a tax year by monthly direct debit or quarterly bill. Those paying monthly will continue to do so. However, from April 2011, if you previously received quarterly bills from HMRC, they will now issue you with two payment requests (instead of four quarterly bills) in October and April showing payments due by 31 January and 31 July respectively. This change brings the payment of Class 2 NIC into line with other self-assessment payment dates.
If you are lucky enough to be living abroad and you pay voluntary Class 2 (or voluntary Class 3) NIC annually, these changes will not impact you and your NIC will continue to be collected annually.
Use of Class 4 Losses
In addition to Class 2 NIC, self employed individuals are also subject to Class 4 NIC on their trading profits. However, in the current financial climate, many traders may find themselves in a (temporary!) loss making position.
For income tax purposes, the trading loss can be set against income from other sources, such as employment income or rental profits (reducing your income tax liability and freeing up the pennies to pay the electric bill!).
However, for NIC purposes, the loss you utilise against other income for tax purposes does not reduce the losses carried forward for Class 4 NIC purposes. The loss continues to be carried forward or offset against future Class 4 profits - effectively giving two bites at the cake!
Getting rid of NIC cards
Historically, HMRC have notified individuals of their NIC number for the first time by sending them a plastic number card. Last year, as part of a cost cutting exercise (every penny helps!), it was announced that this would cease. HMRC stopped issuing NIC number cards to adults from July 2011. Individuals will now be notified of their NIC number by letter. However, those approaching age 16 and eligible to receive a number automatically will continue to be sent cards until later in the year.
HMRC also stopped issuing replacement NIC number cards in October last year. If you need a reminder of your national insurance number you can still contact HMRC and you will be sent a letter confirming the number.
Proposal to merge NIC and Income Tax
It was announced in the last Treasury Budget that the government are considering merging NIC and income tax into a single regime. How this will work in practice is still open to some debate – stay tuned to hear how this progresses!
If you would like any further advice regarding NIC, the changes to the state retirement age or assistance with planning for your retirement, please contact email@example.com.