My wife is due a full state pension so why does HMRC want £179 more in National Insurance?

My wife has just received an HMRC letter saying ‘Self employed class 2 national insurance contribution due’. 

To the unsuspecting it looks like a tax demand and could easily cause concern and some may even pay it.

My wife is 65 years old, has a full 35 years of NI contributions, and does not need to contribute more.

She has checked and has a forecast for the full state pension starting in two years’ time.

This is a very confusing demand and I am sure would cause some people to pay up even though it makes no difference to the state pension. Is this newsworthy as it certainly needs highlighting to the unwary?

Ask Steve Webb your question. Email pensionquestions@thisismoney.co.uk 

Steve Webb replies: Thank you for sharing this letter with me. I agree that the letter is potentially misleading.

Before dealing with the contents of the letter, it’s worth a quick recap on how National Insurance (NI) is levied on the self-employed, as the system has changed recently and can be rather confusing.

There are two types of NI applying to the self-employed.

The first is ‘Class 2’ contributions, which are a weekly flat rate amount. The second is ‘Class 4’ contributions which are an annual profits tax.

Paying (or being credited with) Class 2 contributions helps to build up entitlement to benefits and to the state pension, whilst Class 4 contributions are simply a tax. Details of current and historic rates and thresholds for self-employed NI are here.

There are two key numbers that self-employed people need to be aware of.

The first is £12,570 per year, which is known as the ‘Lower Profits Limit’. (This is also the level of the income tax personal allowance and the starting point for employees to pay National Insurance). 

Anyone with profits above this level has to pay ‘Class 4’ NI contributions, which are simply a tax on your profits above this level and up to a ceiling.

The second key number is currently £6,845. This is the ‘Small Profits Threshold’. 

Since April 2024, anyone with profits above the Small Profits Threshold is automatically treated *as if* they had paid Class 2 National Insurance Contributions. As a result, their National Insurance record for the year in question is protected.

However, if – as in your wife’s case – you are registered self-employed but have profits below the Small Profits Threshold, you can choose to pay Class 2 NI on a voluntary basis. 

Last year the weekly rate was £3.45, and this is where the £179.40 annual figure in your wife’s letter comes from.

You will notice that this is entirely optional, but paying NI can, in principle help build up a state pension and also help with entitlement to contributory sickness benefits such as Employment Support Allowance (and also to Maternity Allowance).

Turning now to the letter your wife received, I agree with you that it is potentially misleading.

I think that anyone who gets a letter on HMRC notepaper which says “payment due”, with an amount and a deadline would reasonably think that they needed to make the payment.

In addition, the letter says that if your wife does not do so she may get a ‘reduced’ state pension.

However, for the reasons set out above, there is no obligation on your wife to pay these contributions.

In addition, you have told me that your wife has already paid enough NI to qualify for a full state pension, so paying extra NI when she does not have to do so could be a waste of money.

One problem with these letters is that members of the public may assume that the people who keep your NI records (HMRC) would know if you already had enough NI for a full state pension, and wouldn’t suggest topping up if it was of no value. 

But, unfortunately, state pension calculations are done by another government department (Department for Work and Pensions) and HMRC does not check with DWP before sending out these letters.

I asked HMRC for their response to your concerns and a spokesperson said:

‘The letter makes clear this is a request, rather than a demand, and that we won’t send any further requests if we don’t receive a payment. We keep the wording of our letters under review and encourage customers to check our NICs guidance on Gov.uk before making a payment.’

Whilst it is true that the letter does include the word ‘request’, it also says that an amount is ‘due’, so this is confusing at the very least. And the line about not sending further requests could equally be read as saying that HMRC will take enforcement action if you don’t respond to this letter.

And the line about not sending further requests could equally be read as saying that HMRC will take enforcement action if you don’t respond to this letter.

In addition, it is frustrating that text about potentially being short of a full pension is included in letters being sent to people for whom this is not relevant.

I’m grateful to you for drawing my attention to this letter and I have fed back to HMRC my suggestions for how it could be improved in future.