National Insurance Contributions
The Basic State Pension is a flat rate benefit based on the number of years (qualifying years ) in which a person paid or were credited with a minimum amount of National Insurance Contributions (NICs).
These contributions may be either Class 1, 2, 3 or 4 National Insurance Contributions (NICs).
The NICs may be affected though for some over 60s or for married women or widows so check these pages if you fall within these categories. Furthermore, check whether your personal circumstances mean that you are "credited " with earnings or Class 3 contributions. This would reduce the number of qualifying years you need to satisfy Basic State Pension conditions.
Class of Contributions
Class 1 Contributions
Since April 1975, employees aged 16 or over and under pension age have to pay NICs based on their levels of earnings. You must pay Class 1 contributions if your earnings are at or above the Primary Threshold which is currently £155 per week in 2015-16 (from £153 in 2014/15).
If you earn more than the Upper Earnings Limit (UEL) (currently £815/week) you will pay the standard rate of NIC (currently 12%) on earnings between the Primary Threshold and the Upper Earnings Limit, and a lower rate of NIC (currently 2%) on earnings above the UEL.
Class 1 contributions are made up of two elements:
- The employee's contribution (primary contribution)
- The employer's contribution (secondary contribution)
Employers must pay NICs even if the employee is over state pension age.
Class 1 contributions give entitlement to all benefits with contribution conditions.
Class 2 Contributions
Class 2 contributions are paid if you are self employed. Class 2 is a flat rate £2.80/week in 2015 -2016 (from £2.75 per week
for 2014 - 2015) paid for every week you are self-employed, including holiday periods, regardless of how much you earn.
You can be exempt from Class 2 NICs liability, if your net profit is expected to be less than the Small Earnings Exception (SEE) limit (currently £5,965 per year 2015-16). You may be exempt from Class 2 NICs for any contribution week due to various circumstances, such as being in receipt of Sickness Benefit, Invalidity Benefit or Employment Support Allowance for the whole week.
Class 2 Contributions give entitlement to all benefits with contribution conditions except contribution-based Jobseekers Allowance.
Class 3 Contributions
These are voluntary contributions paid if you wish to protect your entitlement to the State Pension and you do not pay enough National Insurance contributions in another class. The rate is currently £14.10/week in 2015 -2016 (from £13.90/week for 2014 - 2015).
Class 4 Contributions
Class 4 NICs are for self-employed people whose net profits are over a certain amount. Class 4 National Insurance contributions are paid in addition to the flat rate of Class 2 National Insurance contributions. These contributions are profit-related, so unlike Class 2, not all self-employed people will have to pay them.
They do not count towards benefit entitlement.
If you earn less than the lower earnings limit (currently £112/week), you do not pay NICs but you are not building up entitlement to the Basic State Pension.
Those earning between £112 per week (lower earnings limit) and £155 per week (primary threshold) will not pay NICs, but will be treated as having paid contributions for the purpose of their pension record.
If you are unable to work - due to sickness, unemployment, fostering or caring responsibilities - your contribution record may be protected by credits .