Understanding the Role of National Insurance in Your UK State Pension is key to making informed decisions about your financial future. National Insurance is used to calculate your State Pension and affects how much you receive.

Getting the full State Pension means you must have paid or been credited with at least 10 years of National Insurance contributions. Furthermore, if you do not have the full 10 years, you may still be eligible for a reduced amount.

What is National Insurance?

National Insurance is a tax that UK workers pay to contribute to the country's social security system. It is paid by employees through PAYE or paid directly if you are self-employed. The amount of National Insurance you pay is based on your earnings, and there are different rates depending on your income.

What is the State Pension?

The State Pension is a payment that the UK government provides to people who have reached the age of retirement. Moreover, the amount of your State Pension depends on your National Insurance contributions. The more National Insurance you pay, the more you get in State Pension benefits. Worth noting that the current State Pension age is 66, but will increase to 68 by 2046.

How to Top Up Your National Insurance Contributions?

Where there are gaps in your National Insurance record, you may be able to pay to fill them in. Do this by making voluntary National Insurance contributions. Given that, top up your National Insurance contributions to increase your State Pension benefits. Moreover, make voluntary contributions if you are employed, self-employed, or not working.

Gaps in your National Insurance record

Get a State Pension forecast which will tell you how much State Pension you may get. Apply for a National Insurance statement from HM Revenue and Customs to check if your record has gaps.

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There's no denying that national insurance is a tax. Unlike other taxes such as VAT, income tax, corporation tax, capital gains tax, national insurance has a particular relevance in the retirement of individuals in United Kingdom. National Insurance gives you access to a wide range of state benefits, but also it contributes towards your future state pension in the United Kingdom.

How much you pay, when you've paid it impacts on the amount of state pension you can draw down. And in this week's I Hate Numbers Podcast, I'm going to be explaining the main types of national insurance that exist for individuals. I'm going to be talking about the link between national insurance and your state pension.

I'm gonna be throwing a few numbers into the mix as well, and giving you an overview about the amount of state pension that you could potentially get, and what do you do if you haven't quite made enough payments towards national insurance and your future state pension. So stay tuned folks, and listen and find out more.

You are listening to the I Hate Numbers podcast with Mahmood Reza. The I Hate Numbers Podcast mission is to help your business survive and thrive by you better understanding and connecting with your numbers. Number love and care is what it's about. Tune in every week. Now, here's your host, Mahmood Reza.

Hi folks. My name is Mahmood. I'm a business finance coach, a financial storyteller and tax advisor who's helped thousands of businesses over the last 28 plus years make more money in their business, increase their financial understanding, increase their financial awareness, reduce the stress and anxiety in their.

Who doesn't want more of that? Let's crack on with a podcast. The first thing I'm gonna be talking about is the main types of national insurance and national insurance has its own peculiar language, has its own peculiar vocabulary, and we have what are called classes of national insurance. As a quick run through individuals who are in employment that could be working for your own company or working for somebody else as an employee,

you will be liable to pay Class One national insurance. If you are self-employed, you have two types of national insurance there that you're gonna be liable to pay. And it all depends on how much profits you generate in your business. And the two types are Class Two. And that's where you might see that small amount being payable through your tax return.

It's currently just over three pounds, three pound, and five if you wanna be specific per week. 158 pound and 60 pence per year. The other national insurance is Class Four, and again, that's paid subject to the level of your profits. Check out the show notes folks for the details and link to those rates.

The other class that you're likely to have is Class Three, which is a voluntary one, and if you're thinking, why on earth would somebody volunteer to pay tax? Well stay tuned and I'll expand on that later. Now, having established what the main types of National Insurance are, payable by individuals, we can then link them to what the relevance is for state pension.

At some point in the future, when you slow down things in your life, you retire partly or fully. You need to make sure that you've got income to sustain yourself. Now, one of the things that we can rely on in the UK is an entitlement (question mark) to a state pension. These are the main things we need to bear in mind as far as the state pension is concerned.

And then we're gonna link that back to national insurance contributions. Firstly, under current legislation, the state retirement age is 66. Once you reach that magic age of 66, if you've qualified by paying sufficient national insurance contributions, you will get a basic state pension. Then while we're talking about retirement ages, folks, if you were born before the 6th of April, 1960, the retirement age is moving up to 67.

If you were born 1977 and after, then it moves up to 68 and who knows, in the next few years, they may shift that retirement age up even more. So currently with the state retirement age of 67 for those born before 6th April, 1960. What that means is when you get to that, uh, retirement age, how much national insurance you've paid into the system will determine the level of state pension. And this is where

how much you paid and how many years you paid it for counts in your favor or may count against you. The maximum number of qualifying years, as they call it, is 35. So if you've had a 35 year record of paying national insurance, and that's typically the class one or the class two. Then you get the full entitlement to state pension, and currently the weekly amount is 185 pounds per week, and you'll be paid that by the way, from state retirement age until the day that you pass away.

Now with life expectances currently estimated for males and females at about 82. What that means is that over that lifetime, that can mount up to be quite a significant sum of money at 9,620 pounds a year for the maximum state pension. If you multiply that by the number of years that you are expected to live, and I'll just do those quick numbers in my head, that could amount to a good 125,000 pounds that will be coming into your coffers. As a spoiler alert, by the way folks, pensions are taxable.

So if you've got any other income, then you'll be liable to tax, but that's a story for another day. Now, the minimum qualifying years that you need for a state pension is 10. So if you've done 10 years, then the state pension you'll receive is gonna be 53 pounds per week, which is equivalent to just under 3000 pounds a year, 2,756 if you wanna be exact.

So that will clock up to about 40,000 pounds over an expected life span for an individual. Obviously if you live longer, fantastic. If you live shorter than that, then it'll be a smaller payout. Anytime between 10 and 35 you can pro rata. Now if we are in a situation now, as you get close to retirement, you might think I'd like to get the maximum state pension.

And to do that, you need to make sure you've got that 35 year record and you are allowed to buy years of contributions. As a ballpark figure, for each year that you are short, you'll pay approximately 800 pounds, but there is an urgency in this situation. On the 6th of April, 2023, the rules change and it says the maximum number of years that you can buy is moved to six.

And what that means is you are getting closer and closer to retirement age, and you've got a record less than 35 years, let's say 25 years for example, buying six years after that only gets you 31 years worth of qualifying benefits, and you will not get the full state pension. Prior to the 5th of April, 2023,

you can go back and you can buy 16 years worth of contributions. It'll cost you 800 pounds of time. But remember each year approximately on a 15 pound increase, that's worth 750 pounds. So it doesn't take a lot of mathematics to work out it's potentially very worthwhile. Now the rules of pension schemes are quite complex.

You probably need a degree from NASA. You need a astrophysics equivalent degree. It can be quite complex, and there are agencies out there that will support you from the pensions advisory service that will help you. Now, here's my advice to all of you out there. If you have paid national insurance, if you are looking at your state pension, wherever you are in your life cycle,

then the first thing you need to do is do a pensions forecast. Check the link in the show notes for the link to the site where you can plug some basic information in and it'll tell you how many years short you are, what your national insurance record is looking like, and which years are nearly paid or which years are incomplete, and then you can make an informed judgment

about whether you are going to buy those extra contributions. If you're relatively young, then you may get that contribution record purely by working. So folks, here's a couple of headlines that we need to take away. Make sure that if your national insurance record is up to date and it's fully paid, if you've got gaps, perhaps where your earnings record was quite low, perhaps where you weren't working.

Perhaps where you made losses in your business or it didn't make as much as you expected, you can top it up. I would normally recommend, by the way, folks that those who are self-employed, you always volunteer to pay for class two national insurance. That's the good national insurance, and that gets you the state entitlement to pensions.

If you are short, you have the option of buying those years. Approximately each year will cost you 800 pounds. But the payback in terms of increased pension contributions is likely to weigh that out. But remember, this is general overview. You need at least 10 years. You need a maximum of 35. There are complications depending when your date of birth is, but that's not the purpose of this podcast.

It's to say, give a carrying call out there, check your national insurance record, do a pensions forecast, find out where you stand, and supplement where you need to. Folks, I hope you found this useful. If you have, I'd love it if you could share that. Let me know. Have you done a pensions forecast? How are you gonna sustain yourself in your retirement?

Until next time, I'll see you on the other side. We hope you enjoyed this episode and appreciate you taking the time to listen to the show. We hope you got some value. If you did, then we'd love it if you shared the episode. We look forward to you joining us next week for another I Hate Numbers episode.