National Insurance & State Pension

National Insurance isn't actually insurance. It's a tax that builds your entitlement to state benefits—mainly state pension, but also unemployment benefits and other state support. You pay it on earnings, and those payments create a record that determines what you'll receive from the state when you retire.

Most people pay National Insurance automatically through their payslip and never think about it. But gaps in your record can cost you thousands in reduced state pension. Understanding how it works means you can spot problems early and fix them cheaply.

How National Insurance Works

If you're employed, you pay National Insurance on earnings above £12,570 annually (the same threshold as income tax). The rate is 8% on income between £12,570 and £50,270, then 2% on anything above that.

Your employer also pays National Insurance on your wages—13.8% on everything you earn above £9,100. You don't see this on your payslip because it's not deducted from your pay, but it's part of the cost of employing you. (For full detail on how National Insurance appears on your payslip and what it means, see Understanding Your Payslip.)

If you're self-employed, you pay Class 2 contributions (£3.45 weekly if profits exceed £12,570) and Class 4 contributions (6% on profits between £12,570 and £50,270, then 2% above that). These are collected via your self-assessment tax return.

What Counts as a Qualifying Year

To build state pension entitlement, you need "qualifying years" on your record. A qualifying year means you've either paid enough National Insurance, or you've received National Insurance credits for valid reasons like unemployment, illness, or caring responsibilities.

For employees: if you earn above £12,570, you get a qualifying year automatically through payroll deductions.

For self-employed: if your profits are above £12,570, paying your Class 2 and Class 4 contributions gives you a qualifying year.

For those not working: you might still get credits if you're receiving certain benefits, claiming Jobseeker's Allowance, caring for children under 12, or caring for someone with disability. These credits count as qualifying years even though you're not paying.

Gaps in Your Record

Common reasons for gaps:

Low earnings: If you earned below £12,570 in a year, you might not have paid enough to qualify. This particularly affects part-time workers.

Time abroad: Living and working outside the UK usually means no UK National Insurance contributions. Some countries have reciprocal agreements, but many don't.

Career breaks: Taking time out for children, caring for relatives, or sabbaticals without claiming relevant benefits means no qualifying years.

Self-employment with low profits: If your self-employed profits were below £12,570, you don't automatically get a qualifying year.

Each gap reduces your eventual state pension. But most gaps can be filled retrospectively by paying voluntary contributions.

Voluntary National Insurance Contributions

If you've got gaps in your record, you can usually pay voluntary Class 3 contributions to fill them. Currently this costs about £17.45 per week per missing year (roughly £907 annually).

This sounds expensive until you compare it to the benefit. Filling one gap year increases your state pension by roughly £328 annually for life. If you live 20 years in retirement, that's £6,560 return on a £907 investment. That's better than almost any other investment you'll find.

You can usually only go back six years to fill gaps, though there are sometimes temporary extensions allowing you to go back further. Check your National Insurance record to see what gaps exist and whether you can fill them.

State Pension Age

You can't claim state pension until you reach state pension age. This is currently 66 for both men and women. It's rising to 67 between 2026-2028, and will eventually rise to 68, though the exact timing keeps changing.

Your specific state pension age depends on when you were born. You can check yours on the government's website. It's worth knowing because it affects when you can access state pension and when you need other income sources to bridge the gap if you want to stop working earlier.

Unlike workplace pensions (which you can access from 55, rising to 57), you cannot access state pension early. If you want to retire before state pension age, you need other income—workplace pension, ISA withdrawals, rental income, or continuing to work part-time.

State Pension Isn't Enough

Full state pension is currently about £11,500 annually. This assumes you've got 35 qualifying years. If you've got less, you get proportionally less.

£11,500 yearly isn't nothing, but it's not comfortable living either. That's roughly £220 per week. If your rent or mortgage is paid off and you have no debts, you can survive on it. But you're not living well. No holidays, limited social activities, constant budgeting.

State pension should be your baseline, not your plan. It's the foundation other retirement income sits on top of. Workplace pensions, personal pensions, ISA savings, rental income—these are what make the difference between survival and comfort in retirement. (See Pensions Demystified for comprehensive guidance on building adequate retirement income.)

Don't build your retirement plan around state pension alone. Treat it as a bonus that provides a baseline income, and make sure you're building additional retirement income through pensions and savings.

Contracting Out (Historical Issue)

Between 1978 and 2016, some people "contracted out" of the additional state pension (SERPS/S2P). They paid reduced National Insurance in exchange for their workplace pension replacing that part of state pension.

If you were contracted out, your state pension forecast might look confusing—it shows a deduction for the contracted-out period. This is normal. Your workplace pension from that period should make up for it.

The contracted out system ended in 2016, so if you're currently working, you're not contracted out. But it can affect your state pension forecast if you worked during the contracted-out period.

Inheriting State Pension

If your spouse or civil partner dies, you might be able to inherit some of their state pension, but the rules are complex and depend on when they reached state pension age and your respective birthdates.

For the new state pension (people reaching state pension age after April 2016), you can't usually inherit anything unless your late partner had "protected payments" from the old system.

For the old state pension (people who reached state pension age before April 2016), widows and widowers might inherit some additional state pension.

This isn't something to plan around. If it happens, it's a modest boost. But don't rely on inheriting a deceased partner's state pension—it's usually minimal or nothing.

Deferring State Pension

You can delay claiming state pension past state pension age. For every nine weeks you defer, your pension increases by 1% when you do claim. That's roughly 5.8% per year.

This can be worth doing if you're still working and don't need state pension immediately. The increased amount is permanent—you get the higher rate for the rest of your life. But it requires living long enough for the delayed claiming to pay off.

Rough break-even point: if you defer for two years, you need to live about 15-17 years past state pension age for the increased amount to outweigh the two years of payments you missed. If you're healthy and have family history of longevity, deferring might be worthwhile. If your health is poor, take it when you're entitled.

NI Credits for Parents and Carers

If you're not working because you're caring for children under 12, you should be receiving National Insurance credits through Child Benefit. This happens automatically if you or your partner claims Child Benefit.

If you're caring for someone with disability for 20+ hours weekly, you might be entitled to Carer's Allowance, which also comes with National Insurance credits.

These credits prevent gaps in your record during caring periods. But you need to claim them—they don't always happen automatically. Check you're receiving credits if you're in a caring role.

Self-Employed Considerations

If you're self-employed with variable income, some years you might not earn enough to get a qualifying year automatically. You need to pay voluntary Class 2 contributions (£3.45 weekly) to ensure the year counts.

Class 2 is cheap enough that it's almost always worth paying even if your profits are below the threshold. Skipping it to save £180 costs you £328 annually in state pension forever. That's terrible value.

If you've been self-employed and have gaps, check whether voluntary Class 2 contributions were the problem. They're often cheaper to pay retrospectively than Class 3 contributions.

International Workers

If you've worked in other countries, you might have built up pension entitlement there. Some countries have reciprocal agreements with the UK—your contributions in that country can count toward UK state pension, or vice versa.

The EU has reciprocal agreements (post-Brexit arrangements maintained this for the most part). Australia, Canada, and many others have agreements. But not all countries do.

If you've worked internationally, check whether your foreign contributions count toward UK state pension. You might have more entitlement than you realise, or you might have gaps that need filling.

Why This Matters

State pension is not exciting. The amounts are modest. The rules are complex. But it's guaranteed income for life, inflation-linked, and incredibly valuable for retirement security.

Missing out on full state pension because you didn't check your record and fill gaps is leaving thousands of pounds on the table. For most people, filling missing years through voluntary contributions is one of the best financial decisions they can make.

It's not sexy. It won't make you rich. But it's foundational retirement income that costs very little to maximise. Check your record. Fill any gaps you can. Then you can focus on building additional wealth on top of that secure baseline.