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LITRG reports on a recent consultation proposing further changes to the circumstances under which you can get a credit towards state benefits without paying a national insurance contribution.

National Insurance credits

The National Insurance system was originally intended as a means of citizens contributing to various benefits they obtain from the state, but lately has been accused of being nothing more than an extra ‘tax’ – the rate of contribution bearing little reflection on benefits received or claimed.

There are four main types of National Insurance (NI) contributions – the ‘classes’, numbered 1 to 4 – each with its own strange rules. In some circumstances, even where you do not have earnings which result in a NI liability, you can claim ‘credits’ towards your contributions record. Some of the details of these credits have altered over time, and the number of years of contributions you must pay to qualify for the full basic state pension has recently been reduced to 30 years.

The recent consultation

A Department for Work and Pensions (DWP) consultation now proposes two further changes:

1. Providing new NI credits for grandparents or certain other ‘relatives’ of children under 12 years old where the child benefit claimant goes out to work; and
2. Withdrawing starting credits from 6 April 2010 for 16 to 18 year olds.

NI credits for relatives

The first of the proposals is to be welcomed. Our key concerns are whether:

• the legislation will be sufficiently well drafted to deliver the basic policy intent – that a person who sacrifices their own earnings capability by looking after another family member’s children while the latter goes out to work can claim NI credits to maintain their own state pension provision; and
• sufficient guidance is available to the public to help them understand where NI credits are available and how claims to other benefits might impact on the transferability of credits to relatives.

Removal of starting credits

The second proposal, to withdraw starting credits (for 16 to 18 year olds), has some logic because current rules allow a student from overseas who has never worked in the UK to leave the UK with an entitlement to a state pension. This seems absurd.

But the short time allowed for this consultation leaves us unhappy that the proposed change may not fully take into account the range of circumstances of people who work in the UK, but not for all of their careers. We would like more information.

Further, it calls into question whether people generally should have to continue making NI contributions up to a seemingly ever-increasing state retirement age (66 by 2020) when they are effectively fully ’paid-up’. NI then looks much more like a tax and perhaps it is time to grasp the nettle of merging it with income tax. We therefore ask the Government to consider a wider review of the NI system.

Useful links

LITRG’s full response to the consultation