Martin Lewis has destroyed an “ancient” myth about how paying National Insurance (NI) goes towards a person’s state pension.
A woman called Jill wrote in to his ITV show to voice her frustration that she still has to pay NI despite having contributed enough to get her full state pension.
She said: “I have worked for 46 years with no break and so I am entitled to the full state pension at age 66. Why do I have to continue to pay NI while I am still working, as it won’t give me a bigger state pension, will it?”
Mr Lewis responded to confirm that unfortunately she would not get a larger state pension despite still paying NI. He explained: “Frankly, the idea that National Insurance is some type of saving fund for you in your old age is ancient.
“National Insurance is a tax. It’s a tax that happens to trigger eligibility for the state pension but it’s just a tax. You pay it because you’re being taxed and the Exchequer wants to tax you that way.”
A person typically needs 30 years of NI contributions to get the full basic state pension and 35 years of contributions to get the full new state pension.
But a person will continue to pay contributions even after they have paid in enough to get the full amount, until they reach the state pension age, which is currently 66.
The Government recently cut the basic rate of NI from 12 percent to 10 percent, as announced in last year’s Autumn Statement.
Mr Lewis explained why the Government may prefer to cut NI rather than other taxes. He said: “When you cut National Insurance rates, you just cut it for earned income.
“Whereas if you had cut income tax, which is the other way you could do it, you would have to cut it for unearned income as well, and therefore it would have more of an effect.
“It’s cheaper for the state to cut the tax that is National Insurance than for the state to cut the tax that is income tax, by the same amount.”
The state pension is set to increase 8.5 percent in April. This means the full new state pension, which Jill is on track to receive, is increasing from £203.85 a week to £221.20 a week, an increase of just over £900 a year.
The full basic state pension will go up from £156.20 a week to £169.50 a week, an increase of almost £700 a year.
These increases will come into effect on April 8. Pensioners on benefits will get a separate pay increase just a few days before, as benefits are increasing 6.7 percent from the start of the new tax year, on April 6.
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