Class 3 National Insurance: The Opportunity Remains
Class 3 National Insurance contributions are one of the most lucrative investment opportunities your clients could ever come across. Those studying for R04 will find this article particularly useful to their exam revision.
This article is correct as at 9 October 2023.
The Benefits
For those with a gap in their National Insurance contribution record, the opportunity is available to purchase additional qualifying years with a one-off lump sum payment. As we outlined in our recent article on this subject, they have a payback period of around 3 years and an expected return of almost 7 times their cost.
This can be significantly magnified if the contribution proves the difference between having the minimum 10 years required to qualify for a State Pension entitlement and getting none at all.
A qualifying year is one in which the client has earnings in excess of a ‘lower earnings limit’, currently £123 per week or £6,396 per annum. Curiously, this is significantly below the £242 per week threshold at which they start actually paying national insurance. This means that the client is effectively getting the benefits of the State Pension and other nationally funded entitlements without actually bearing the cost.
Time Limit on Payments
Under normal circumstances, back-payment of class 3 national insurance contributions is limited to six years after the end of the relevant year for which the contribution is made. Rates are currently £17.45 per week, or £907.40 per annum, though if the contribution relates to one of the two previous tax years, then payment may be made at the rates that applied during the year in question.
For the last 7 years, in recognition of the fact that some people may have been left shortchanged by the 2016 change from 30 to 35 qualifying years for a full state pension, a concession has been in place. Basically, an extension has been given allowing those who wish to make class 3 contributions to make them for tax years all the way back to 2006/07.
The concession was due to come to an end at the end of the 2022/23 tax year and then subsequently the end of July 2023. In an announcement, which flew slightly under the radar, however, HMRC further extended the deadline until 5 April 2025. What’s more, the rate of £17.45 per week to purchase additional qualifying years will be frozen for that time period.
In the current high-inflation environment, the reduction in real cost is only likely to make the real return even more spectacular! This is one that all R04 students should be aware of.
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