State pension deadline extension means thousands are set to earn more

Vicky Parry 13th Jun 2023 No Comments

Reading Time: 4 minutes

The government has extended the deadline for filling gaps in National Insurance (NI) records to April 5, 2025.

Earlier this year, it announced a delay to July 31, 2023, when a surge in calls put too much pressure on HMRC administration. This delay pushes the deadline beyond the general election, so by paying additional NI contributions, taxpayers approaching retirement can possibly increase their state pension, but it could also be helpful to younger people struggling.

Tom Selby, AJ Bell head of retirement policy, said: “Delaying the state pension top-up deadline will offer people valuable breathing room, but this is now the second time the deadline has been pushed back. While the original postponement until July this year offered a short extension, the deadline has now been put back until April 2025, a full two years after the original cut-off. Crucially, it also shifts the problem beyond the general election – potentially creating a ticking time bomb for the next government to deal with.

“The original extension was only ever going to be effective if DWP then staffed its helplines sufficiently to clear the existing backlog and deal with the extra claims that were inevitably going to result.

“Unfortunately, the phone lines are once again jammed, which suggests this hasn’t happened and people are unable to get through to enquire about topping up their NI record. Government should have known that a large volume of calls would be coming in and prepared accordingly.

“For those trying to get through to top-up their state pension, today’s announcement at least gives them extra time, although that still doesn’t tell them when they’ll actually be able to get through on the helpline.”

A quick guide to voluntary NI contributions

A £275 annual income boost for just £824…

“While some of the jargon and complexity involved might be off-putting, boosting your state pension entitlement can deliver significant financial benefits.

“You usually need to pay voluntary ‘Class 3’ NI contributions to top up your state pension entitlement. It costs £15.85 to buy one week’s worth of Class 3 NI, or £824.20 per year.

“Based on someone increasing their entitlement to the ‘new’ state pension (worth £185.15 per week in 2022/23), that could result in an income boost of £5.29 per week or £275.08 per year.

“What’s more, that income will be protected by the ‘triple-lock’, meaning it rises every year by the highest of average earnings, inflation or 2.5%. In April this year, the state pension increased by a whopping 10.1%, in line with inflation in September 2022.

“Broadly speaking, anyone who increases their state pension on these terms will need to live three to four years in order to be in ‘profit’ from the deal.

“Given average life expectancy at state pension age is around nine years for men and 11 years for women – with a decent chance of living into your 90s – those in good health who can boost their state pension could benefit handsomely by doing so.

“However, in some circumstances paying voluntary NI contributions will NOT boost your state pension” (see examples below).

Considerations for those thinking of paying voluntary NI

“Most obviously, the younger you are, the more likely you are to naturally build up the 35-year NI record needed to entitle you to the full state pension. In these circumstances, buying extra NI risks being a complete waste of money.

“If you have had gaps in employment due to caring for children or elderly relatives, you might be entitled to NI ‘credits’. These credits give you exactly the same entitlement to the state pension as voluntary NI contributions – but at zero cost.

“In addition, anyone who previously ‘contracted-out’ of the state pension under the old system (which existed before April 6, 2016) might also be entitled to less than the full state pension – even if they have a 35-year NI record.

“Contracting out (which no longer exists) just meant you paid lower NI and, in return, didn’t receive entitlement to the state second pension (the state pension used to be made up of two parts – the basic part and the state second pension, which was previously called ‘SERPS’).

“If you have previously contracted out, a deduction will be made to your state pension entitlement. If you aren’t entitled to the full state pension as a result of being contracted out, you can buy extra NI years to make up the gap.

“However, not everyone who was contracted-out will benefit from buying extra NI years. This is quite complicated and will depend on what you’d have been entitled to under the old system.”

Income tax considerations

“It’s also important to remember that your state pension will count towards your income tax bill. That means that by increasing the value of your state pension, you could also push yourself into a higher income tax bracket.

“Where this is the case, the benefit of buying extra state pension years will effectively be lower and so it will take a bit longer to ‘break even’.

“In many cases it will still be worthwhile to buy extra NI years, but you should take the time to fully think through the financial implications, ideally with the help of a regulated financial adviser.”

Useful resources

Full details of the Future Pension Centre are available here: Contact the Future Pension Centre – GOV.UK (www.gov.uk)

You can check your state pension forecast here: Check your State Pension forecast – GOV.UK (www.gov.uk)

If, after consulting the Future Pension Centre, you decide you want to pay voluntary NI, details for contacting HMRC are here: National Insurance: general enquiries – GOV.UK (www.gov.uk)

Our guide on all you need to know about pensions here.