snebla

Hi Friends,

Are there any benefits to paying voluntary (Class 3) contributions instead of Class 2?

My wife and I have been living in the US for over a decade and since we moved I've been paying the Class 3 contributions. I see on this forum that people are largely talking about Class 2 contributions. Today I called the HMRC helpline and the person I spoke with encouraged me to research if I should be paying in Class 2 NI contributions instead.

Before leaving UK, both my wife and I were in full time employment, and hence seeing that the literature on Class 2 talked about "self employed" individuals I guess I just assumed that we were ineligible. I'd love your thoughts on this.

Thanks!

tdrinker

Class 2 has greater benefits, but in reality the benefit of both is the pension.

Class 2 is £3.45/week, Class 3 is £17.45/week.

I also inadvertently paid a number of years of Class 3 (I was incorrectly billed by HMRC and was unaware of the rules). So be it, it's still a good investment. Or as Pulaski said, an insurance because the pension isn't that much (after tax) if you have a decent amount of other income, but a godsend if things go awry and you're dependent on it. And like you, I later realised I was eligible for Class 2 and paid that going forwards.

Pulaski

For the purpose of buying qualifying years for a UK state pension, there is literally zero difference between paying Class 3 v Class 2.

Steerpike

The HMRC document above has a link for 'Paying Tax'. This links to another page - https://www.gov.uk/state-pension-if-...-state-pension. That page says 'How much tax you’ll pay and where you pay it depends on where you’re considered to be a resident.' If you are an overseas resident, it saysFollowing the link to the 'double taxation agreement' page, has a list of 'Tax treaties'. For the US, it has this page - https://www.gov.uk/government/public...a-tax-treaties . Then you get a 61-page PDF.

Is there a quick summary of why you may or may not have to pay taxes ...?


Do you have any taxes withheld?

snebla

Thanks tdrinker and Pulaski I'll look into switching to Class 2

vespucci

My understanding has been that no tax has been withheld from my UK state pension because, unlike private pensions, it is paid gross. Being resident in the US, I pay US tax on my UK state pension, but no UK tax.

nunnun

I did a quick calculation about the rates of return and payout rates implied by my lifetime Class 2 NI payments and the SP I'll receive. There are lots of assumptions and estimates and everything is in GBPs.. I think over 35 years I paid an average of 140 pounds Class 2 NI a year and if you compound that at 5% you end you with a total of 14k that my payments might have grown into. The actual total I've paid is around 5k. So if I was to take the 14k and get an index linked annuity paying 11.5k (current SP annual amount) in the first year that's a payout rate of 82% compared to a commercial index linked single life annuity that might pay out at 4.5%. If I was to take the 14k principal and invest it for it to generate the same income as the SP with 3% inflation from age 67 to 85 I'd need an investment gain of 40% every year.

Bottomline is that paying UK Class 2 NI to qualify for a UK state pension looks like the best financial move of my life.

tdrinker

Class 2 is self evidently a remarkable deal; no calculations necessary.

Class 3 can depend on your situation, including whether you live in a frozen pension country, your marginal tax rate and whether alternative investments are more tax efficient, the type of alternative investment (you might still own the principal to use in an emergency or to pass on to your heirs), etc. I paid a mix of Class 2 and Class 3, and am content because whilst I'm not sure the Class 3 payments are financially beneficial, I value peace of mind being entitled to the state pension brings (i.e. should everything else goes wrong, at least I'll can afford a pot).

MidAtlantic

No UK taxes withheld.

nunnun

The US/UK Tax Treaty gives sole taxation rights on cross border state pension/social security payments to the country of residence. You file a US-Individual 2002 to claim the treaty tax treatment and make sure no UK tax is due on UK state pension payments to US residents. Anyway I don't think HMRC usually withholds any tax on SP.

morpeth

The benefits of making class 3 contributions increase , in terms of" return on investment", the closer one is to retirement age if one takes the annual pension amount per year compared to the cost of Class 3 contribution for each year.

nunnun

The choice to pay voluntary NI depends on how long you think you'll be out of the UK. If you think you'll have enough Class 1 NI record from UK employment to get your state pension and other benefits then there's no reason to pay voluntary contributions. But if you can pay Class 2 NI they are so inexpensive that it's a good strategy to pay them "just in case". That's what I did when I came to the US on a 3 year dost doc and that initial 3 years has ended up being 35 years. Paying Class 3 is a harder decision because they are more expensive, but they are still a great deal under the current UK benefits system.

Ravenscroft

Yes this is the same for me. My online information still shows class 3 for all years although I have written confirmation from them that I'm eligible for class 2 payments. I sent the money for all years in one payment which might have been a mistake since none of it's been allocated yet. I've called twice and both times been told that there's a backlog and that my case manager would eventually get around to allocating it. Some people on this thread seem to have been able to get the allocation taken care of over the phone but that hasn't been my experience. For reference I got my confirmation that I could make up payments back to 2006 in February of this year.

alfista1

Good to know thanks.
I need to call them before paying for previous years by the looks of it. I just paid for 2023 as it was stated on the letter. Kind of a test to ensure they have got that one payment before I transfer more.
Also want to know from them why they have applied class 2 for some random years and not all.
2023 - class 2
2018- 2022 - class 3 even though I had the same job overseas (this is strange and want to know why - possibly they have the wrong information)
some random years prior to 2014 class 2!!

Mez12

I received my letter saying I can pay class 2 NIC. I have 13 qualifying years up to now(I’m 35).

Do I wait for another letter now with information to pay or is there a webpage with payment information?

The letter I received just says if I want to change from an annual payment I can fill in another CF83.