what a finance expert wants you to know

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Always feel that the deductions on your monthly payslip for ‘national insurance’ have an air of mystery about them? You’re not alone!

Most people know it’s a kind of income tax and paying it goes towards the state pension. But what many don’t realise is just how important national insurance is to their future financial security, and the system isn’t easy to keep up with. We asked Annabelle Williams, personal finance specialist at Nutmegand author of the book Why Women Are Poorer Than Men to give us the lowdown and answer some of your burning questions.

What does National Insurance have to do with the state pension?

There are two sources of income for older people who can’t work – savings and state support, with the main government payment being the state pension.

*National insurance (NI) is deducted by employers from the payslips of staff who earn enough (more than £184 a week currently) and paid to HMRC, which keeps a track record of how many years each person paid it for. People need to have made these NI ‘contributions’ for 35 years to receive the ‘full new state pension’ which is currently £179.60 a week, paid after the age of 66.

*This system is inherently problematic for women. That’s because the threshold to qualify for the state pension, which is 35 years of paid work with high enough earnings, is only generally achievable by the male half of the population. Women don’t fit well into this model because far more women do unpaid work, often for years or decades, and we’re the majority of those working part-time and in low-paid work.

national insurance contributions explained

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*People who have worked and paid NI for at least 10 years (which don’t need to be as consecutive years) receive a smaller amount a state pension. Typically, it’s women who are in this position; in 2006 just 13% of women qualified for the basic state pension compared to 92% of men. And it’s not because 87% of women weren’t working during their lives, it’s because the work they have done is unpaid and at home. These are the people who need the most financial support in old age, because they didn’t work for long enough for an employer or earn enough, they won’t have been able to build up retirement savings.

This age of ‘entitlement’ for the state pension differs depending on the year you were born. It’s gradually rising for younger people too – those in their twenties and thirties can expect that they won’t be able to receive this state pension until the age of 68 at least.

*Something that’s crucial for people to understand about the state pension is that it’s such a small amount that it is difficult to live on. You cannot expect to have a comfortable lifestyle by relying on the state pension alone, so you really have to save into a pension through work or one you open independently. At the same time, having that £179 a week in old age will be really handy so it’s important that people know what NI is and how they can keep up with their contributions during their career.

What if I’m self-employed?

Self-employed workers find out how much National Insurance they need to pay when they file their annual tax self-assessment. The big caveat to this is for self-employed women who are planning to become parents. If you expect to be claiming maternity allowance before the annual tax assessment shenanigans begin, you should pay National Insurance in advance, before the end of the current tax year. Start arranging this at least five months before the little one arrives. You do this through the government portal mentioned below.

Just like income tax, there are different rates of National Insurance depending on a person’s ‘profit’ which is earnings after deducting work-related expenses. Those with profits under £6,725 in the 2022/23 tax year do not have to pay National Insurance although it’s a good idea to make voluntary contributions (more on this below).

How is National Insurance calculated? The amount you pay depends on your employment status and how much you earn. Not everybody has to pay it. It is calculated on gross earnings, above an ‘earnings threshold’. To find out how much you will pay, visit gov.uk

What happens to your NI if you are between jobs, on maternity leave or on carer’s duties?

People who aren’t in paid work can claim ‘credits’ which count towards the 35 years of NI contributions. This happens automatically when people are on certain benefits, such as jobseeker’s allowance, and when receiving statutory maternity pay.

However, the rules around NI can be fiendishly complicated and one quirk in the system is catching out many women, including those who are well-versed in personal finance.

Women who stop working to care for children will lose their NI contributions unless they apply for child benefit, even if they know they are not eligible for it. This happens because people who aren’t working and caring for a child under the age of 12 can receive NI credits, but only if they apply for child benefit.

However, in a confusing twist, people who are not eligible for a child benefit because their partner earns too much still need to apply for it, get rejected, and then they will be given the NI credits.

How do I check my NI record?

It’s a good idea to check in a few times during your career to see how many years of NI contributions you have on your record. You can do this via the government website, called Government Gatewaywhich you need to register for.

This is really important because under the current rules people can only make backdated payments to top up their record for the last six years. So if you log in for the first time aged 55 and realise that you have many missing years from your twenties, you cannot go back and repay NI in a bid to qualify for the full state pension.

How do I top up my National Insurance contributions?

On the Government Gateway site, alongside displaying your NI record, it will show whether you are allowed to make some additional payments to fill in gaps. These are called ‘voluntary’ contributions and it’s really important that women check in a few times during their careers to see if there are gaps and if they can be filled. Your future self will thank you for it!

What is a NI number? It is a unique reference code that never changes – two numbers, six letters and a final number. You are given an NI number for life and anyone who wants to work in the UK must have one. You can find your National Insurance number on your payslip, your P60, on any letters about tax, pensions and benefits or the NI section of your personal tax account. You can apply for a National Insurance number if you do not have one or find your National Insurance number if you’ve lost it.

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