A HMRC processing error, in early 2024, is resulting in HMRC incorrectly refunding some voluntary Class 2 National Insurance paid by self-employed taxpayers.
If you have recently received a tax refund, well actually a National Insurance refund, of £163.80, then you could be affected. You may think nothing of it. You could then find an unexpected gap in your National Insurance record. As a result, it could reduce your State Retirement Pension by £329 pa, in today’s terms, for the rest of your life from State Retirement Age.
Late processing error by HMRC
It appears that those self-employed taxpayers, with profits in 2022-23 below the Small Profits Threshold of £6,725, or who made a trading loss, who made the voluntary Class 2 National Insurance payment are affected.
HMRC ran a crucial routine after 31 January 2024, rather than on or before that date. The routine moves the voluntary National Insurance payments from the Self-Assessment system to the taxpayer’s National Insurance record. As a result, Class 2 payments were rejected and refunded. Therefore, the tax year will not be counted as a qualifying year towards your State Retirement Pension.
Affected taxpayers are receiving an update tax calculation and a short message that reads: “I have corrected your self-assessment because you did not pay the Class 2 National Insurance shown on your Tax Return.” The letters say that taxpayers did not pay on time, even though they did, because of the later refund. The process to correct the missing Class 2 National Insurance payment is time consuming.
Like any self-employed taxpayer that pays their Class 2 National Insurance late, after 31 January, the only option available is to telephone the HMRC National Insurance department on 0300 200 3500, obtain a unique payment reference and make the one-off National Insurance payment.
HMRC says that it is now looking into the issue. Based on the available information, it appears to have affected taxpayer Self-Assessment tax and National Insurance payments made between 20 December 2023 and 31 January 2024.
Past Class 2 National Insurance rules up to 2023-24
Only the self-employed pay Class 2 National Insurance. Director-shareholders working through a limited company are classed as employees, and therefore not affected. Employees pay Class 1 National Insurance.
Class 2 National Insurance for 2022-23 was £163.80. It is £179.40 for 2023-24.
The rules for paying Class 2 National Insurance changed for tax years 2022-23 and 2023-24. I summarise the main rules.
Prior to 2022-23, you paid Class 2 National Insurance if your self-employed profits were above the Small Profits Threshold, which was £6,515 in 2021/22.
For 2022-23 and 2023-24, you pay Class 2 National Insurance if your self-employed profits are above the Lower Profits Limit, of £12,570 (2022-23: £11,908).
If your self-employed profits are below the Small Profits Threshold, of £6,725, including making a self-employed trading loss in the year, you can choose to pay voluntary Class 2 National Insurance. I would normally advise these types of self-employed taxpayers to tick the box on their Tax Returns and voluntary pay Class 2 National Insurance. These are the people who may be affected with in the incorrect HMRC refunds.
If your profits from self-employment are between the Small Profits Threshold and the Lower Profits Limit there is no Class 2 National Insurance to pay; though you will be treated, for most state benefit purposes, as if you had paid Class 2 National Insurance.
Future Class 2 National Insurance rules - 2024-25 and onwards
As announced in the Autumn Statement of November 2023, from 6 April 2024, no one will be required to pay Class 2 National Insurance. Details of the changes are:
Self-employed people with profits above £12,570 will no longer pay Class 2 National Insurance, but will receive a National Insurance credit towards state benefits, like the State Retirement Pension.
Self-employed people with profits between £6,725 and £12,570 will continue to receive state benefits, like the State Retirement Pension, through a credit without paying National Insurance.
The self-employed with profits under £6,725, and who voluntary elect to and actually pay Class 2 National Insurance will continue to receive state benefits, like the State Retirement Pension. These types of taxpayers will therefore need to continue to make an election on their annual Tax Returns and pay the National Insurance before 31 January following the end of the tax year on 5 April each year.
The value of Class 2 National Insurance contributions
By paying Class 2 National Insurance, or receiving a free Class 2 National Insurance credit, you receive entitlement to contributory benefits, like the State Retirement Pension, in the same way as if you had actually paid Class 2 National Insurance. Each tax year that you pay or receive a Class 2 National Insurance credit gives you a qualifying year.
One qualifying year of the new flat rate State Retirement Pension is worth £329 pa in 2024-25 on the basis that you accumulate at least 10 qualifying years before state retirement age. If you accumulate the full 35 qualifying years, the State Retirement Pension is worth £11,502 pa (£329 x 35).
HMRC new online voluntary National Insurance payments service
Individuals can now check online for any gaps in their National Insurance record and look into the effect on their State Retirement Pension of making make voluntary National Insurance payments etc via a new online service.
The ‘Check your State Pension forecast tool’ has been introduced by HMRC and Department for Work and Pensions (DWP). People can also use the HMRC app. It should provide a full end-to-end service for taxpayers to check their National Insurance records and State Retirement Pension forecast …… and make voluntary National Insurance payments if required, all without needing to telephone H M Revenue & Customs.
Individuals can use the new service to choose which tax years they want to fill, pay the required amount to fill the tax year and pay securely any voluntary amounts. Thye can then check later online that their National Insurance record has been updated.
Individuals access the new service using their existing HMRC personal tax account login details.
Currently, the new service is not available to those already drawings their State Retirement Pension, the self-employed, or those living outside the UK.
Those who cannot use the new service have to follow the ‘old’ process. This involves deciding how many years of National Insurance to pay for, calculating the amount to pay, call HMRC to get an 18-digit reference number, making the payment and using the reference number to HMRC, and then wait for the extra NI years to be credited to their record. The whole process can take two months.
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