Will earning under new NI threshold hit state pension qualifying years

My wife earns around £11,300 working at the local school. She has been paying National Insurance as she earned above the previous primary threshold.

Now that the threshold has been raised in the Spring Statement and she will no longer pay NI, does it mean she will not qualify for a state pension? 

If she now has to buy NI contributions then it seems she will be considerably worse off than she was before. Is this the case?

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Steve Webb replies: The good news for your wife (and many others in a similar position) is that although she will start saving money from July, when the new threshold comes in, there will be no adverse effect on her state pension position.

The way that National Insurance Contributions (NICs) work is that employees have to start paying NICs once they earn more than the ‘primary threshold’.

From April 2022 that threshold is £9,880 per year, and the NI rate will be 13.25 per cent (up from 12 per cent this year) on earnings between the ‘primary threshold’ and the ‘upper earnings limit’ of £50,270.

What the Chancellor announced in his Spring Statement is that the ‘primary threshold’ will be increased in July 2022 to £12,570 per year, bringing it into line with the starting point for income tax.

This means that your wife’s National Insurance bill will reduce to zero from that point onwards.

However, even though your wife will no longer be paying NICs, her state pension position will be protected.

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This is because there is a separate threshold in the system – the ‘lower earnings limit’ – and this will be £6,396 per year.

Anyone earning above this amount will receive National Insurance *credits* to protect their state pension position, even if they are no longer liable to pay NIC contributions.

Although your wife is not self-employed, it might be helpful if I also run through the changes as they will affect these workers.

In fact, the Spring Statement changes are particularly favourable to the low income self-employed.

In the financial year just ending (2021/22), self-employed people had to pay flat rate (Class 2) NI contributions if their profit was above the ‘small profits threshold’ of £6,515.

From April 2022, no Class 2 NI contibutions will be due until you your profit exceeds the ‘lower profits limit’ of £9,880. And from July 2022, the lower profits limit will be increased to £12,570, the same as for employees.

However, as with employees, there is a safeguard for the self-employed in the form of National Insurance credits. For the self-employed this will apply to those with profits above the small profits threshold (£6,725 in 2022/23).

They will automatically be credited towards their state pension even if they are not liable to pay any NICs.