If you only work part-time and, therefore aren't paying your full National Insurance Contribution, you may be concerned about how it might affect your State Pension when you reach retirement age. In this article, we look at how National Insurance Contributions work and what you need to have put in to qualify for your State Pension.
How do National Insurance Contributions work?
You pay National Insurance Contributions (NICs) to build up your entitlement to certain state benefits, including the State Pension. The amount you pay depends on your age, how much you earn, and whether you're employed or self-employed. You stop paying National Insurance Contributions when you reach State Pension age.
How does National Insurance work if you're employed?
If you're employed, you pay Class 1 NICs. From the 6th April 2024, these are paid at 8% of the amount you earn between £242 and £967 per week, and 2% on any income above that. You may pay a lower rate if you're a married woman or widow with a valid ‘certificate of election’ or you’re deferring National Insurance Contributions because you’ve got more than one job. If you earn less than the 'primary threshold' of £242 per week, you do not need to pay any NICs.
How does National Insurance work if you're self-employed?
If you're self-employed, you pay Class 4 NICs. From the 6th April 2024, these are paid at 6% on profits between £12,570 and £50,270 or 2% on profits over £50,270. Most people pay both through a Self Assessment tax return. You may be able to pay voluntary Class 2 contributions to avoid gaps in your National Insurance record if you have profits of less than £6,725 a year. If you have gaps in your contribution record and do not make voluntary contributions, this may affect the benefits you are entitled to, such as the State Pension.
How does National Insurance work if you’re employed and self-employed?
If you're an employee but also undertaken your own self-employed work, your employer should deduct your Class 1 NICs from your wages, but you may have to pay additional Class 4 NICs for your self-employed work. How much you pay ultimately depends on your combined wages across both employed and self-employed work. HMRC can inform you of how much NIC you are due to pay after you file a Self Assessment tax return.
How to qualify for a State Pension
In order to receive the full new State Pension, you have to accrue 35 qualifying years of National Insurance Contributions. So not paying NICs for a period of time won’t necessarily mean you won’t receive a full State Pension in retirement, as long as make up for it with 35 full years of contributions in total.
It is possible to find out how much State Pension you may be entitled when you come to retire - not only so you can plan financially but so you can take action if your State Pension is likely to be less than expected - by obtaining a State Pension forecast.
A State Pension forecast gives you detailed information on what you might receive when you reach state retirement age. The forecast will estimate both your basic State Pension as well as any additional State Pension (S2P) you may be entitled to. Fortunately, the State Pension forecast also includes information on how to improve your basic State Pension by means of paying voluntary NICS. We explain this in more detail in our article 'How to fill gaps in your National Insurance record to boost your state pension'.
Does paying into a work pension affect your State Pension entitlement?
No, paying into a work pension has no impact on your entitlement to a State Pension. Your eligibility for a State Pension is based solely on your record of NICs. So, if you ensure that you make at least 35 full years of NICs across your working lifetime (regardless of any gaps), you will usually still be entitled to the full State Pension. Where this may not be the case is if you were contracted out of the state pension and you can read more about this on the GOV.UK website.