Time is running out to top up your State Pension

Posted on: 22nd March 2023 in Pensions

*This article has been updated to reflect the government’s latest deadline extension to top up your UK State Pension.

What if we told you, you could turn £8,000 into £60,000?

You would probably think this is a get-rich scheme you should avoid at all costs. But what if we told you this scheme is actually run by the UK government?

You would probably run to your phone or computer to take advantage. In fact, that’s what a lot of people did, leading to a surge in those contacting HM Revenue & Customs to top up their State Pension.

So people didn’t miss out, the government extended the deadline for National Insurance (NI) State Pension top-ups.

And if you have worked abroad or have gaps in your employment, now is the time to take note. Especially as expats could benefit from an even better offer.

Here’s what you need to know.

How does National Insurance affect my pension?

First, you need to understand how National Insurance (NI) affects your State Pension.

The State Pension is based on National Insurance Contributions (NICs). Each full year of NICs is called a ‘qualifying year’ on your record.

Here are the two key points you need to know:

• You need at least 10 qualifying years to receive any State Pension
• You need 35 qualifying years to receive the maximum State Pension

Every qualifying year beyond 10 years and up to 35 adds more to the value of your State Pension. At the current rates, every qualifying year adds up to £302.64 to your annual pre-tax State Pension.

NICs are automatically deducted from your salary, so you don’t usually need to worry about gaps. But it’s a different story for those working overseas.

While working abroad, you often don’t make NI payments. Unless you were aware of this and made voluntary contributions, you could find gaps in your NI record.

And if you do have gaps, now is the time to act.

NIC deadline extended

Here’s how the government’s pension deal works.

Normally, you can only go back six years to fill in gaps in your NI record. For example, in 2023, you could only go back as far as the 2016-17 tax year under normal circumstances.

However, the government is now letting you fill in gaps, all the back to April 2006.

Previously, the deadline for this was April 2023, and in March 2023, HMRC extended the deadline to 31 July 2023.

But in a recent announcement, the UK government extended the deadline again, this time by almost two years. You now have until 5 April 2025 to fill in gaps as far back as April 2006.

From 6 April 2025, it will revert back to a six-year limit. It will also likely cost more. At the time of writing, it’s unclear how much more this will be, as the rates for the 2025/26 tax year are still unknown.

However, the government has confirmed that any voluntary NIC payments will be accepted at the existing 2022-23 rates until 5 April 2025. This means you can plug gaps for less money.

If you remember, at the top of this article, we said you could turn £8,000 into £60,000. That wasn’t an over-exaggeration, so let’s circle back to that and break down the numbers.

How limited-time NI top-ups could boost your pension pot

Until 5 April 2025, filling gaps in your NI record from 2006/07 to 2019/20 will cost £824.20 for each full year. There are two exceptions:

• The 2020/21 tax year is £795.60
• The 2021/22 tax year is £800.80

Each qualifying year on your NI record adds up to £302.64 each year to your pre-tax state pension.

So, how did we get £60,000 from an £8,000 investment? Let’s set up a scenario to explain.

Suppose you have a 10-year gap on your National Insurance record between 2009 and 2019. Filling in your NI record gaps for that period would cost £8,242 (£824.20×10 years=£8,242).

Remember, each qualifying year you buy adds roughly £302.64 to your pre-tax State Pension – in this case, we are buying 10. This would boost our State Pension to just over £3,026 annually (£302.64×10 years=£3,026.40).

Over the course of a 20-year retirement, that works out to £60,528 (£3,026.40×20 years) – just over £52,000 return on your investment.

While we used 10 years in this example, the gains could be much higher if you were to fill in gaps all the way back to April 2006 on your NI record.

Also, most expats can boost their State Pension in the same way but at a significantly lower cost.

A better deal for expats?

Most people will pay class 3 contributions. The example above is based on the rates of class 3 voluntary NICs.

However, if you have been living and working in Dubai as an expat or elsewhere, you can likely plug gaps at a much lower rate. This is because you will pay class 2 contributions, not class 3.

Expats may be eligible for class 2 contributions if:

• They worked in the UK immediately before leaving
• Previously lived in the UK for at least 3 years in a row OR;
• Paid at least 3 years of contributions

It will cost far less if you qualify to pay class 2 contributions. This means you get the same boost to your State Pension, but the cost of that boost is significantly lower.

For example, the rate for class 2 contributions for the current tax year (2023/24) is £3.45 per week and £3.15 for the previous tax year (2022/23). In comparison, class 3 contributions will set you back £17.45 and £15.85, respectively.

But remember, while the extension to the top-up scheme is in place, any contributions are payable at the 2022/23 rate of £3.15.

That means if you were to fill the same 10-year gap as we used in the example above, it would cost you £1,638 rather than £8,242 for the same £60,000 boost to your State Pension.

As you can see, those paying class 2 contributions will have a much better return on their investment due to the lower cost of filling gaps on their NI record.

State Pension top-ups: the small print

This pension top-up offer only applies to those who qualify for the new State Pension. You qualify for the new State Pension if you are:

• A man born on or after 6 April 1951
• A woman born on or after 6 April 1953

Those who reached the State Pension age before 6 April 2016 will get the basic State Pension instead, and the top-up concession does not apply.

So, those who can take advantage of the NI top-ups extension are:

• Those not at the State Pension age currently
• Those who receive the new State Pension and want to boost their income

Should I plug the gaps in my National Insurance record?

As the name implies, your National Insurance (NI) record is a complete record of how much NI you have paid across each tax year.

Not sure how to check yours? Don’t worry. Our article on how to check your National Insurance record gives you a full breakdown.

Ok, now you know how to check your NI record, and you’ve logged in to your account. But to your surprise, you have gaps! Don’t panic and automatically rush to fill them; instead, read on.

First, you can’t go above the cap, so don’t try.

You need 35 qualifying years to receive the full State Pension. You won’t receive more by going past the 35-year threshold.

If you have 35 qualifying years on your record but also have gaps, filling them will not net you any further benefits. You also need to consider your tax bracket.

Increasing your State Pension could push you into a higher tax bracket when combined with other income, such as a private pension. Paying 40% or more tax could make voluntary contributions harder to justify as it will take longer to break even.

Let’s look at the other end of the scale.

The government’s extension means you can plug gaps all the back to April 2006. If you have 19 years of NICs, you could increase that to 35 years and receive the full State Pension at the cost of £13,135.

While that may seem like a large amount, it could net you a substantial return.

The difference between 19 and 35 years of NICs is just over £4,880 annually. This means you will actually be in the black after receiving the full State Pension for only three years.

And after 20 years, this would amount to £97,600 – a gain of just over £84,600 on your initial investment.

These numbers are based on the current rates and do not factor in future increases. The State Pension receives annual increases in line with or above inflation thanks to the Triple Lock.

Ultimately, whether or not you should plug gaps in your NI record will depend on your circumstances. If you are unsure what the right move is for you, speak to a professional who can help you make a more informed decision.

What other ways can I boost my retirement income?

As we’ve shown, taking advantage of the National Insurance top-ups before 5 April 2025 can substantially impact the amount of State Pension you receive.

However, at a current rate of just over £203 per week, it’s unlikely to cover your income needs.

A retirement planning strategy is the best way to ensure you are fully prepared and have the means to live the life you want when you stop working.

Why not check out our Financial Advice for Retirement Planning guide to learn more about the benefits and how it could help you build a more secure future.

If you are ready to get started, we can help.

Holborn Assets is a leading, award-winning financial services company. Our aim is simple; to do what is right for our clients to help them achieve their financial goals.

Start planning for tomorrow, today. Contact Holborn Assets to learn how we can help you.