The coronavirus pandemic has hurt the income of many people across the country during 2020/21.

Not everyone will have been eligible for support that has been offered by the Government, and those that are may not have received full pay.

Income drops have an impact on both National Insurance Contributions (NIC’s) payable and the record of contribution, which has a determining effect on entitlement to state pension and contributory benefits.

An individual reaching state pension age on or after 6 April 2016 needs 35 qualifying years to receive the full single tier state pension.

Maintaining records for employees

Employees pay Class 1 National Insurance, and this is how they build up their entitlement to pensions and other benefits.

For a year to be a qualifying year, the employee must have been paid or credited with NI on earnings equal to 52 times the lower earnings limit.

For 2020/21, the lower earnings limit Is £120 per week, meaning this amount for the year is £6,240.

If earnings are between the lower earnings limit and the primary threshold, which is set a £189 per week during 2020/21 then contributions are payable at a notional zero rate. As such, the employee receives the benefit of this, but doesn’t have to pay anything.

Weeks that are missed are not a problem, as long as contributions are paid on earnings of £6,240 for 2020/21.

When employees earn just above the lower earnings, time spent on furlough or unpaid leave can cause earnings on which contributions are paid to drop below the minimum contribution amount, meaning that the year will not be a qualifying year.

If an individual is out of work for a period, and depending on whether they receive benefits (and what benefits they receive), then they may get Class 1 National Insurance credits. This will protect the year, allowing it to be classed as a qualifying one – credits are also paid to individuals who claim child benefits.

What about the self-employed?

Although self-employed people pay both Class 2 and Class 4 National Insurance contributions. The payment of Class 2 contributions, which are £3.05 per week for 2020/21 is what contributes towards state pension and benefit entitlement.

If earnings are below the small profits level, set at £6,475, then the self-employed earner is entitled but not liable to pay Class 2 contributions. If the individual doesn’t want to pay Class 2 contributions and doesn’t pay Class 1 contributions or receive NIC credits, then the year doesn’t count as a qualifying one.

Pay voluntarily, or not pay at all?

If an individual has also reached the 35 qualifying years before they reach state pension age, then a missing year will not impact state pension entitlements. 

If they have less than 35 years, and will be able to reach the minimum 10 years needed for a reduced state pension by the time that they reach state pension age, then making voluntary contributions can be beneficial in the long run.

Having earnings from self-employment of less than the small profits threshold £6,475 for 2020/21 means you can pay Class 2 contributions voluntarily.

At £3.05 per week for 2020/21, this is a cheap and worthwhile option.

Where there are no earnings from self-employment, paying voluntary contributions means paying Class 3 contributions at £15.30 per week for 2020/21.

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Any questions?

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