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TaxationWeb by Peter Arrowsmith, FCA

Peter Arrowsmith, FCA highlights a potential dilemma for those individuals considering the payment of Class 3 National Insurance contributions.

Class 3 NIC

Class 3 contributions have been in the news lately. For those who don’t know, current rules require specified amounts of earnings or NIC credits in 90% of the years in a persons working life in order to get a full rate state pension. The working life is currently therefore 44 years for men and 39 for women for those who make it to retirement age – less for those who die before then in which case the length of their working life may be of relevance to others.

The Pensions White Paper issued in May this year suggests that the 90% requirement will be reduced to 30 years from 2010.

Points to consider

This therefore presents a dilemma for many people currently thinking of paying Class 3 voluntary contributions – including some who have been notified by HM Revenue and Customs of a ‘deficiency’. If payment is made, then come 2010 it may prove to have been unnecessary. So what to do right now?

First, we should not forget that the proposal does not affect anyone reaching state pensionable age before 6 April 2010.

For others, due to the NIRS2 computer debacle, Class 3 contributions for the years 1996/97 to 2001/02 inclusive need not be paid until 5 April 2009 in any event AND the ‘penalty rate’ will not be applied. For 2002/03 the normal time limit does not expire until 5 April 2009 but the penalty rate currently applies (as it does to 2003/04). The penalty rate simply means that you pay the amount current at the time of payment (ie, now £7.55 per week instead of the £6.85 and £6.95 per week that applied in 2002/03 and 2003/04 respectively). And the penalty rate will apply to 2004/05 for payments made on and after 6 April 2007 (the rate for 2007/08 will be announced in late November or early December).

My advice is certainly to wait until nearer April 2007, and probably beyond even at the expense of incurring the penalty rate. Each individual must decide whether they assume that the current government will stay in power and legislate as planned or whether they prefer to play safe and pay at slightly cheaper rates now for certainty and peace of mind.

Bereavement payments

All of that is fine as far as the state pension goes but married persons and civil partners will need to think also about bereavement benefits. The rest of my comments are framed in terms of a widow but broadly the same position applies to others. For the lump sum bereavement payment of £2,000 all that is needed is for the husband to have had 25 weeks of earnings, etc in any one tax year. Few will fail this test. But for widowed parents allowance (payable to those with children at the time of widowhood) or bereavement allowance (payable for up to one year to those aged 45 or over at the time of widowhood) the 90% of working life rule again applies (at least until 2010). So if there is a gap it may also cause a reduction in the payable rate of these two benefits. However, provided a decision in made in full knowledge of all these facts then my advice is still – don’t rush.

The next news may well be in the Queens Speech on 15 November when hopefully further pensions legislation will be announced and a Bill soon thereafter.

P Arrowsmith, FCA
October 2006