Why should I pay national insurance once I've paid enough for a state pension?

Getting the full state pension should rank high up on everyone’s retirement planning wish list; it’s a truly valuable source of income to help you meet your later life needs.

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interactive investor’s head of pensions and savings, Alice Guy, recently crunched some numbers and calculated that the equivalent personal or workplace pension pot needed to replace the state pension is a whopping £199,000.

To pocket the full amount once you hit the age you can claim it, which is currently 66 but rising to 67 in 2028, you need to have paid at least 35 years’ qualifying national insurance contributions (NICs) during your working life.

Interestingly, to bank one year’s qualifying NICs you don’t need to work the full 52 weeks of the tax year. Under the current regime you just need to earn at least £6,396 (called the lower earnings limit) or receive sufficient NI credits, which you can get from looking after young children.

But it’s possible that you may pay qualifying NICs for 45 or even 50 years – especially if you entered the workforce in early adulthood and haven’t taken any lengthy career breaks. And in case you’re wondering, once you hit the 35-year holy grail you don’t stop paying NICs, nor will it entitle you to a bigger state pension.

To understand why, let’s unpack how the national insurance (NI) system works and also explain how you can get the full state pension.

How do I get a full state pension and why is it important?

You usually need at least 10 qualifying national insurance years to get any state pension, and 35 qualifying years to get the full state pension.

If you have between 10 and 35 qualifying years, you get a proportion of the full state pension.

A couple who both receive the full state pension will pocket £21,200 this year (£10,600 each) – a valuable source of income to support you in old age. As the government kept its pledge to maintain the triple lock, this figure will rise to £23,004 (£11,502 each) from April.

A couple of studies underscore the state pension’s importance to help meet later-life needs. Research from interactive investor found that just over a quarter (28%) of over 55-year-olds have no pension savings and are completely reliant on what the state provides.

Elsewhere, research by the Institute of Fiscal Studies (IFS) and abrdn Financial Fairness Trust found that among retirees aged 66–74, the state pension makes up 70% of the income for the lowest-income fifth, 45% for the middle fifth, and 20% for the highest-income fifth. In short, while it’s more valuable for some than others, it’s valuable for almost everyone.

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Why do I still pay NICs once I have 35 qualifying years?

The way the NI system works differs to how you accrue private and workplace pension benefits.

That’s because the NICs paid by today’s labour force are used to pay the pensions of today’s retirees. So, while the NICs you pay during your working life enable you to accrue state pension benefits, this money isn’t kept in a separate pot and held for you once you can claim it.

Although not explicitly labelled as such, NI is a tax. In fact, it’s the UK’s second-biggest tax. During the 2022-23 tax year, the government raked in £176 billion in NICs, more than 22% of total tax revenue.

A further reason why you don’t stop paying NICs once you have 35 years in the bank is that the system also supports those who are unable to work and beef up their NIC record. This might be because they’re raising children under the age of 12, caring for an elderly relative, are disabled, or on maternity. Those in this group may receive “NI credits” towards their eventual state pension.

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And there are other factors at play. As the retirement population grows and working population shrinks, the state pension is increasingly coming under strain. The situation would exacerbate if workers stopped paying NICs once they hit the 35-year requirement.

The old-age dependency ratio - the percentage of individuals aged 65 and over per 100 people compared to those of working age, defined as anyone aged 20-64 - helps to explain why. A shift has taken place over the past few years.

According to the government’s Census 2021, the number of people aged 65 years and over increased from 9.2 million in 2011 to over 11 million in 2021. What’s more, over the same period the proportion of people in the UK aged 65 years and over rose from 16.4% to 18.6%.

How will the recent changes to NICs affect my state pension entitlement?

Jeremy Hunt announced major reform to NICs at his 2023 Autumn Statement.

The chancellor scrapped class 2 NICs, a flat rate paid by the self-employed, and reduced class 4 NICs, which are paid on self-employed profits between £12,570 and £50,270, from 9% to 8%. These changes will take effect from April 2024.

Employed workers will also enjoy lower NICs. From 6 January, the main rate class 1 NICs, which are paid on earnings between £12,570 and £50,270, will drop from 12% to 10%.

These cuts will cost the government around £10 billion a year but will not affect the existing state pension system. You still need 35 qualifying years’ NICs to get the full amount.

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When paying extra NICs can make a difference

In some instances, paying extra NICs may boost your state pension. But this will only likely apply to older workers, and you still can’t get more than the current £10,600 a year maximum.

In the past, the state pension was split into two parts: basic state pension and additional state pension. There are layers of complexity here, but, put simply, employees were able to redirect part of their NICs to a private or workplace pension.

The way this worked was that the employer and employee were given a rebate on their NICs, and in return the pension scheme promised to replace part of the employee’s state pension. One of the key selling points was that you could access this portion sooner, rather than having to wait until you reached state pension age. However, many people are actually worse off than if they had remained in the additional state pension.

At retirement, the employee would receive a lower state pension to reflect the reduced rate of NICs.

Under the new state pension, introduced in 2016, a one-off deduction is made from the state pension rights of those workers who have been contracted out in the past. Because of this deduction, even those who have 35 years in the system by 2016 may not have accrued a full state pension at that point.

The good news for those in this position is that each year you contribute from 2016 onwards will build on your state pension until it reaches the new full amount. And so, paying extra contributions beyond 35 years may in some cases help to uptick what you receive.

If you’d like to know where you stand, head to gov.uk and check your state pension forecast. This will tell you how much you could get, when you’ll get it, and what you can do to boost it.

If you have any gaps, you can fill these by paying class 3 NICs, which is flat rate of £17.45 a week.​​​​​​​

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How can I pay lower NICs?

Like many other taxes, NI can be tricky to swerve.

But if you’re still working and want to reduce your NIC bill, one option is salary sacrifice. This is where you trade a portion of your salary for a pension payment. Under auto-enrolment rules, you’ll almost certainly be paying into a pension anyway, so it’s a useful trick to save you tax with little effort.

As your salary is lower, you pay less NICs, and so does your employer. You also pay less income tax too.

If you’re a limited company owner/director, paying profits straight into a pension rather than taking it as salary can save you both employer and employee NICs, and could save your company up to 25% in corporation tax.

One important point to conclude with is that once you reach state pension age you stop paying NICs, even if you’re still working.