National Insurance Contributions – Bridging the Gaps

The Rules

Compulsory National Insurance Contributions are only payable on earned income.

However, if you have gaps in your contributions, it could reduce the amount of state pension you receive when you retire, therefore you might consider making voluntary contributions.

The rules state that:

• If you retire having paid contributions for less than 25% of the qualifying years (1) for a basic pension, you will not receive any basic state pension, nor will you be able to get a refund for the contributions made.

• If you have paid contributions for more than 25% of the qualifying years but do not qualify for the basic state pension, you will get a basic state pension of between a minimum of GBP 21.82 and a maximum of GBP 87.30 per week, pro-rated on the number of years you contributed.
  
  
• If you have paid contributions for 100% of the qualifying years you will be entitled to the full basic state pension (currently GBP 87.30 per week)

It is possible to get the HMR&C (HM Revenue & Customs) to assess your pension forecast based on contributions made. To do this you will need to complete form BR19 at the Pension Service website, or you can call them directly on 0845 3000 168 quoting your National Insurance number.

Maternity Leave

If you are claiming child benefit in your name for a child under the age of 16 and you are registered with the HMR&C you will automatically qualify for Home Responsibilities Protection (HRP). This is a scheme set up to protect your basic state pension while you care for your child. Basically, it reduces the number of qualifying years you are required to make NIC contributions.
It is valid if you were claiming benefits from the beginning of the tax year ie. Since 1st April and until your youngest child is 16, provided you do not exceed the limits set out for self-employed earnings (see below). However, you can only reduce the number of qualifying years by a maximum of 10 years.

Non Earning/Earnings under the required minimum

Class 3 NICs

For any period of time you are not earning enough for required contributions, the voluntary contributions you would pay are Class 3 National Insurance Contributions, payable at a flat weekly rate of GBP 7.80.

Employed

If your earnings in a tax year exceed GBP 4,524, it will be considered as a qualifying year and you and your employer will have the appropriate NIC deducted at source from your salary. (For more details on employer/employee contributions refer to the pension service website).
If your earnings are below this threshold and you do not make voluntary contributions, you will have gaps in your contribution record, which can reduce the amount of state pension you receive when you retire.

Self-Employed

Alternatively, your other option is to register with the HMR&C as being self-employed. If you do this you will be subject to Class 2 and possible Class 4 NICs.

Class 2 NIC s

In the current tax year (ie from April 1, 2007) Class 2 NIC is payable to the HMR&C at a weekly flat rate of GBP 2.20. This would not change substantially year on year.
You can get an exemption if you earn less than GBP 4,635 in the tax year, however by not paying contributions you may lose entitlement to full state benefits. Therefore, it is better to pay Class 2 otherwise you would have to pay voluntary Class 3 to ensure entitlement to all benefits, which are currently more expensive.

Class 4 NICs

Class 4 NICs are paid on profits above a certain level. They do not entitle you to state benefits but they are a legal requirement and are calculated as part of a self-employed person's annual tax return.

Class 4 NICs are payable at 8% on annual profits between GBP 5,225 and GBP 34,840 plus 1% on any profits above that.

For example, if you made a profit of GBP 10,000 in the tax year, you would pay:
8% * (10,000 – 5,225) = GBP 382.

NB: Bear in mind that if you opt to become self-employed, you should notify HMR&C and arrange to pay Class 2 National Insurance contributions as soon as you start self-employment. If you don’t, it could mean that you will be liable to a penalty of £100 and will have to pay National Insurance contributions at a higher rate. There is also a possibility you could lose entitlement to some state benefits.

Useful Links

Please refer to the following websites that I think you might find useful:
http://www.businesslink.gov.uk/
(Here you can answer a few basic questions to assess your NIC requirements)
http://www.thepensionservice.gov.uk/