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-   -   How are Voluntary Class 2 NICS recorded on your UK NI statement (https://britishexpats.com/forum/usa-57/how-voluntary-class-2-nics-recorded-your-uk-ni-statement-938855/)

Glasgow Girl May 29th 2021 12:49 pm

How are Voluntary Class 2 NICS recorded on your UK NI statement
 
For those of you making Voluntary Class 2 NI contributions, how are they identified on your NI record? My Class 1 NICS earned while working in the UK are identified as “Paid Employment : £xxxx", and my Class 2 voluntary contributions made after I moved to the US are identified as “Self Employment: 52 (or 53) weeks”. I have never been self employed in the US, always working for a corporation. Is this how your Voluntary Class 2 NICS are recorded as well? I started Voluntary Class 2 Contributions way back in the late 90’s if that makes any difference.

I was expecting to see something that made it clear that the Class 2 contributions were voluntary so that I can reduce the amount by which my US Social Security will be WEP’d. I only have 20 years of SS contributions and retired very early so will not be adding to that and will therefore be subject to the full WEP. I am continuing to contribute Voluntary Class 2 NICS until I reach the maximum UK state pension and so the proportion of Voluntary NI’s to Paid NI's will increase thus reducing the amount of the UK state pension that is subject to WEP, but I want to make sure that the Class 2 Voluntary NICS are recognized as such when the time comes to claim US SS and calculate the WEP amount.

Thank you to anyone who can help with this.

durham_lad May 29th 2021 9:42 pm

Re: How are Voluntary Class 2 NICS recorded on your UK NI statement
 
I think voluntary contributions are simply recorded as voluntary contributions regardless of Class 2 or Class 3.

My Class 3 contributions state the following from the DWP website where I downloaded a PDF of my contributions


2019-20 Full year
You have contributions from
Voluntary: 52 weeks
.
.
.
1987-88 Full year
You have contributions from
Paid employment: £603.69

Glasgow Girl May 29th 2021 11:27 pm

Re: How are Voluntary Class 2 NICS recorded on your UK NI statement
 
Thank you. That is interesting. I was expecting to see Voluntary as well. Not sure why it states self employment. I will have to call them and find out what is going on.

durham_lad May 30th 2021 11:20 am

Re: How are Voluntary Class 2 NICS recorded on your UK NI statement
 

Originally Posted by Glasgow Girl (Post 13012060)
Thank you. That is interesting. I was expecting to see Voluntary as well. Not sure why it states self employment. I will have to call them and find out what is going on.

I have never been self employed so can’t say how it is reported. My wife had 6 years where she did not work and we had at least 1 child under school age. This is also made clear that the contributions were not from paid employment


1986-87 Full year
You have contributions from
National Insurance credits: 52 weeks

These may have been added to your record if you were ill/disabled, unemployed, caring for someone full-time or on jury service.
1985-86 Full year
National Insurance credits: 52 weeks
These may have been added to your record if you were ill/disabled, unemployed, caring for someone full-time or on jury service.

tht May 30th 2021 8:27 pm

Re: How are Voluntary Class 2 NICS recorded on your UK NI statement
 
My class 2 (made as a voluntary contribution while working in the US) shows as the below, example from last year:

”2019-20 Full yearYou have contributions from

Self-employment: 53 weeks”



Glasgow Girl May 30th 2021 8:51 pm

Re: How are Voluntary Class 2 NICS recorded on your UK NI statement
 
Thank you. That is exactly how mine appear as well. I know Class 2’s are usually for the self employed back in the UK, although some of us overseas qualify for them as well. I guess Self-employment is how they categorize all Class 2’s regardless of why they are being made. I wanted to make sure that my record was not a mistake, and it would seem that this is just how they do it.

newadventure Jun 2nd 2021 4:26 pm

Re: How are Voluntary Class 2 NICS recorded on your UK NI statement
 
Same with me - voluntary NI contributions while working in the US shown as Self-employment. However, for 2019-20 my Full year is only 52 weeks

Glasgow Girl Jun 2nd 2021 4:39 pm

Re: How are Voluntary Class 2 NICS recorded on your UK NI statement
 
Thanks for that data point. I have never been self employed either in the UK or US and can only conclude that they categorize all Class 2 contributions as Self Employed, even if totally voluntary and and there is no self employment. Perhaps they can only use one identification category and since Class 2 Contributions were primarily designed for the Self Employed they are identified as such, and because Class 3 were designed for voluntary contribution they are identified as Voluntary

Hopefully when the time comes I can convince US Social Security that these were indeed voluntary contributions and so use them to reduce my WEP. It sounds like I will not be the first person to bring this to the table.

TexanScot Jun 3rd 2021 2:08 pm

Re: How are Voluntary Class 2 NICS recorded on your UK NI statement
 

Originally Posted by Glasgow Girl (Post 13013166)
Hopefully when the time comes I can convince US Social Security that these were indeed voluntary contributions and so use them to reduce my WEP. It sounds like I will not be the first person to bring this to the table.

Out of interest, do you have any sort of current basis in law to claim that treatment from the SSA?

I'm going to be in the same boat as you are in that I'm likely to be subject to WEP when I eventually claim Social Security, and I'd love to know if there's a way to disregard voluntary contributions.

Are you able to share any research or articles on this that you've came across so far?

MidAtlantic Jun 3rd 2021 2:44 pm

Re: How are Voluntary Class 2 NICS recorded on your UK NI statement
 

Originally Posted by TexanScot (Post 13013528)
Out of interest, do you have any sort of current basis in law to claim that treatment from the SSA?

I'm going to be in the same boat as you are in that I'm likely to be subject to WEP when I eventually claim Social Security, and I'd love to know if there's a way to disregard voluntary contributions.

Are you able to share any research or articles on this that you've came across so far?

Have fun and trawl through this: https://fas.org/sgp/crs/misc/98-35.pdf

As per the Social Security website: The Windfall Elimination Provision (WEP) is a provision in United States law that changes the way your U.S. Social Security benefits are calculated. WEP can reduce your U.S. retirement or disability benefits if you receive a pension based on work and you did not pay U.S. Social Security taxes on those earnings. Emphasis mine.
https://www.ssa.gov/international/wep_intro.html


tht Jun 3rd 2021 2:49 pm

Re: How are Voluntary Class 2 NICS recorded on your UK NI statement
 

Originally Posted by MidAtlantic (Post 13013547)
Have fun and trawl through this: https://fas.org/sgp/crs/misc/98-35.pdf

As per the Social Security website: The Windfall Elimination Provision (WEP) is a provision in United States law that changes the way your U.S. Social Security benefits are calculated. WEP can reduce your U.S. retirement or disability benefits if you receive a pension based on work and you did not pay U.S. Social Security taxes on those earnings. Emphasis mine.
https://www.ssa.gov/international/wep_intro.html

I read this as the key part:

and you did not pay U.S. Social Security taxes on those earnings” the class 2 contributions I make are from US taxed earnings that I pay SS on.

durham_lad Jun 3rd 2021 2:53 pm

Re: How are Voluntary Class 2 NICS recorded on your UK NI statement
 

Originally Posted by TexanScot (Post 13013528)
Out of interest, do you have any sort of current basis in law to claim that treatment from the SSA?

I'm going to be in the same boat as you are in that I'm likely to be subject to WEP when I eventually claim Social Security, and I'd love to know if there's a way to disregard voluntary contributions.

Are you able to share any research or articles on this that you've came across so far?

it is plain from the rules that WEP only applies to pensions earned from paid employment where SS contributions (FICA) were not paid. Class 2 might be an issue because it usually applies to self employed folks therefore the contributions are coming from money you earned.

I believe Class 3 is not an issue and in conversations with Federal Benefits Unit persons when applying for SS I was told you should be able to exclude the portion of the UK State pension gained from those contributions. I was told to have all your paperwork ready at the time of application. My wife has a telephone appointment to complete her application on July 1st and she has PDF copies from the DWP website so we will know soon if this is actually the case.

TexanScot Jun 3rd 2021 4:31 pm

Re: How are Voluntary Class 2 NICS recorded on your UK NI statement
 

Originally Posted by tht (Post 13013549)
I read this as the key part:

and you did not pay U.S. Social Security taxes on those earnings” the class 2 contributions I make are from US taxed earnings that I pay SS on.

Yeah, that's the bit I'm not 100% clear on.

If I'm paying voluntary NICs (whether they are Class 2 or Class 3), then is the entitlement always disregardable since it was based on voluntary contributions rather than on earnings?

Glasgow Girl Jun 3rd 2021 4:48 pm

Re: How are Voluntary Class 2 NICS recorded on your UK NI statement
 

Originally Posted by TexanScot (Post 13013528)
Out of interest, do you have any sort of current basis in law to claim that treatment from the SSA?

I'm going to be in the same boat as you are in that I'm likely to be subject to WEP when I eventually claim Social Security, and I'd love to know if there's a way to disregard voluntary contributions.

Are you able to share any research or articles on this that you've came across so far?

I cannot point to anything specifically right now. But I have been tracking and researching this off and on on using many resources, including the US SS sites, for about 10 years and my understanding is as stated above that any part of your UK state pension based on work and you did not pay U.S. Social Security taxes on those earnings is subject to WEP.

Therefore any part of your pension based upon Class 1 Contributions will be included in the WEP calculation because it is based upon UK work/earnings and no US SS contributions were deducted. Any part of your pension based upon credits will be excluded because that part of the pension was not based upon earnings.

Voluntary Contributions can be looked at in two ways. First, as tht stated you can take the position that you paid the voluntary contributions from US earnings on which SS contributions were deducted. However that would exclude people making Class 3 Voluntary NI’s who are not employed.

The second position is that Voluntary Contributions are only allowed if you are unemployed (Class 3 only) in which case there are no earnings so the WEP clause does not apply, or you qualify because of employment (Class 2 or 3 depending upon personal circumstances prior to leaving the UK) and if you have SS deducted from that employment then again the WEP clause does not apply.

The history of WEP is very complex but in simple terms the intent is to ensure that you do not receive more SS than you would have had your entire lifetime earnings been subject to US SS deductions. In very simple terms the SS payment is a function of your average lifetime earnings. They take the average of your best 35 years ($0 for years which there were no earnings with SS deducted) and calculate the monthly SS as 90% of the first $996, 32% of anything between $996 and $6,002, and the remainder at 15%. It is therefore very heavily skewed towards those with lower earnings. Those who have relatively high earnings but few years will have an average lifetime wage similar to those on lower wages with the full 35 years, and will receive the maximum payout (or close to it). This will be in addition to any pensions derived from other earnings such as UK pensions, and was deemed to be a windfall and unfair (and a good opportunity for a government money grabbing exercise). Hence the introduction of WEP. It was actually intended to catch government employees who do not pay SS and receive a pension in lieu of SS, but they found that many employees worked in both the government sector and the private sector over their careers and ended up with a larger combined pension/SS than those with similar earnings made wholly in the private sector. We expats just got caught up in the system.

With all that said, it is sort of fair if you can bend you head around it.


Glasgow Girl Jun 3rd 2021 4:59 pm

Re: How are Voluntary Class 2 NICS recorded on your UK NI statement
 
I think the only confusion is on how they document Class 2 Voluntary NI’s. It seems that they are recorded as Self Employed if you are paying Class 2’s and Voluntary as Class 3. I am no longer too worried about that since it appears that recording Class 2’s as Self Employed is just how they do it when you are abroad. Regardless, I can prove that I paid SS on all earnings for the years in which I made NI’s and therefore the WEP clause should not apply.

As a point of reference, over the years I have had several people confirm that years associated with these Voluntary Contributions are excluded from WEP, BUT you have to point this out to the SS people as many of them will be unaware of UK Voluntary NI’s and you have to walk them through the process.

TexanScot Jun 3rd 2021 5:15 pm

Re: How are Voluntary Class 2 NICS recorded on your UK NI statement
 

Originally Posted by Glasgow Girl (Post 13013593)
They take the average of your best 35 years ($0 for years which there were no earnings with SS deducted) and calculate the monthly SS as 90% of the first $996, 32% of anything between $996 and $6,002, and the remainder at 15%. It is therefore very heavily skewed towards those with lower earnings.

I appreciate the background knowledge, thank you so much.

Based on how I understand it, my worry is that us older migrants who won't have the full 35 years before retirement are going to be hit somewhat harder by this, as we'll have less qualifying years and so a lower base Social Security entitlement to begin with before WEP comes into play.


With all that said, it is sort of fair if you can bend you head around it.
I can certainly understand the intent behind the regulation, as I can see how it's not really fair for people to get a higher payout from the taxpayer when the taxman hasn't had the same opportunity to have his cut.

I don't want to have to rely on the State Pension or Social Security to fund my retirement but they are both entitlement programs that I've paid into, and I'd still like to maximize my eventual payout as far as the law will allow.

TexanScot Jun 3rd 2021 5:18 pm

Re: How are Voluntary Class 2 NICS recorded on your UK NI statement
 

Originally Posted by Glasgow Girl (Post 13013597)
I am no longer too worried about that since it appears that recording Class 2’s as Self Employed is just how they do it when you are abroad.

I had to obtain a tax and earnings statement from HMRC for USCIS, and the columns on the document are:

Tax Year, Employer, Earnings, Tax, NI

I would assume that on any year where you've paid voluntary contributions the Earnings column would show 0, which I'd hope would be sufficient evidence that the contributions weren't based on employment that year.

Glasgow Girl Jun 3rd 2021 5:36 pm

Re: How are Voluntary Class 2 NICS recorded on your UK NI statement
 

Originally Posted by TexanScot (Post 13013604)
I appreciate the background knowledge, thank you so much.

Based on how I understand it, my worry is that us older migrants who won't have the full 35 years before retirement are going to be hit somewhat harder by this, as we'll have less qualifying years and so a lower base Social Security entitlement to begin with before WEP comes into play.

That is true, but because the payment is so heavily skewed to the first $12,000 or so in average annual earnings you likely wont lose out on too much, which is back to why they introduced it in the first place. Like you, I get the reasoning, but I don’t like it!

Something to take into account which may or may not apply to you is that WEP applies to all foreign pensions. Therefore if you have a UK company pension of any kind (unless 100% funded by only you) then they are going to WEP that as well. The maximum income from all sources subject to WEP in 2021 is $996 per month (resulting $498 per month deduction).

I moved all of my UK pensions into a SIPP to avoid getting WEP’d on that income since I do not intend to draw from that on anything close to a regular basis,

Glasgow Girl Jun 3rd 2021 5:37 pm

Re: How are Voluntary Class 2 NICS recorded on your UK NI statement
 

Originally Posted by TexanScot (Post 13013608)
I had to obtain a tax and earnings statement from HMRC for USCIS, and the columns on the document are:

Tax Year, Employer, Earnings, Tax, NI

I would assume that on any year where you've paid voluntary contributions the Earnings column would show 0, which I'd hope would be sufficient evidence that the contributions weren't based on employment that year.

Good to know. I was not aware of that.

TexanScot Jun 3rd 2021 5:40 pm

Re: How are Voluntary Class 2 NICS recorded on your UK NI statement
 

Originally Posted by Glasgow Girl (Post 13013615)
Therefore if you have a UK company pension of any kind (unless 100% funded by only you) then they are going to WEP that as well. The maximum income from all sources subject to WEP in 2021 is $996 per month (resulting $498 per month deduction).

I had private pension provision in the UK yes, but it was Defined Contribution rather than Defined Benefit.

I'd always planned to take it on a lump sum basis post-retirement, on the understanding that the entirety of the amount would be classed as taxable income in the year of crystallization.

In any event it won't be a life changing amount, but it will be enough to buy me a very nice and extended holiday in the year when I retire :)

TexanScot Jun 3rd 2021 5:41 pm

Re: How are Voluntary Class 2 NICS recorded on your UK NI statement
 

Originally Posted by Glasgow Girl (Post 13013616)
Good to know. I was not aware of that.

For reference I don't think it's a standard document that they make available online - I had to submit a SAR under GDPR in order to request it, but it at least confirms that they have systems or processes internally that are capable of extracting the information.

tht Jun 3rd 2021 6:12 pm

Re: How are Voluntary Class 2 NICS recorded on your UK NI statement
 

Originally Posted by TexanScot (Post 13013583)
Yeah, that's the bit I'm not 100% clear on.

If I'm paying voluntary NICs (whether they are Class 2 or Class 3), then is the entitlement always disregardable since it was based on voluntary contributions rather than on earnings?

I need to look at this a little closer, my situation may be slightly more complicated. When I first because a PR I commuted to the UK for work for a few years. So I was taxed and paid NI in the UK, but then as a US resident all that income was declared in the US and taxed again (with a credit against federal income tax). But I think I then paid SS on it as well, in addition to state and city tax. So while I may have a full year of NI, I may have paid full / max SS on that same income as well.

TexanScot Jun 3rd 2021 6:45 pm

Re: How are Voluntary Class 2 NICS recorded on your UK NI statement
 

Originally Posted by tht (Post 13013634)
I need to look at this a little closer, my situation may be slightly more complicated. When I first because a PR I commuted to the UK for work for a few years. So I was taxed and paid NI in the UK, but then as a US resident all that income was declared in the US and taxed again (with a credit against federal income tax). But I think I then paid SS on it as well, in addition to state and city tax. So while I may have a full year of NI, I may have paid full / max SS on that same income as well.

I'm pretty sure I skimmed something in the WEP guidance regarding the Social Security Totalization Agreement, the provisions of which might cover you if you were a tax resident in the US (which you would have been as a Permanent Resident) yet paying foreign Social Security contributions on earnings in the UK.

I skimmed over it was it wasn't relevant to me, but it sounds like it might be to you.

newadventure Jun 3rd 2021 7:56 pm

Re: How are Voluntary Class 2 NICS recorded on your UK NI statement
 

Originally Posted by Glasgow Girl (Post 13013615)
Something to take into account which may or may not apply to you is that WEP applies to all foreign pensions. Therefore if you have a UK company pension of any kind (unless 100% funded by only you) then they are going to WEP that as well. The maximum income from all sources subject to WEP in 2021 is $996 per month (resulting $498 per month deduction).

Sorry, can you clarify? When you say WEP applies to all foreign pensions, you mean that the amount of SS is reduced, not that the foreign pension is reduced?

tht Jun 3rd 2021 8:05 pm

Re: How are Voluntary Class 2 NICS recorded on your UK NI statement
 

Originally Posted by TexanScot (Post 13013645)
I'm pretty sure I skimmed something in the WEP guidance regarding the Social Security Totalization Agreement, the provisions of which might cover you if you were a tax resident in the US (which you would have been as a Permanent Resident) yet paying foreign Social Security contributions on earnings in the UK.

I skimmed over it was it wasn't relevant to me, but it sounds like it might be to you.

Yes I need to take a look, but my plan A is to hit the 30 years of “substantial earnings”. I have been paying SS since age 30 so it should be doable if I don’t spend to much time not working at-least part time.

Glasgow Girl Jun 3rd 2021 8:14 pm

Re: How are Voluntary Class 2 NICS recorded on your UK NI statement
 

Originally Posted by newadventure (Post 13013674)
Sorry, can you clarify? When you say WEP applies to all foreign pensions, you mean that the amount of SS is reduced, not that the foreign pension is reduced?

Yes, the SS amount is reduced not the foreign pension. The point was that the WEP calculation will aggregate all foreign pensions based upon earnings on which SS was not deducted and use that total to determine how much WEP to deduct from SS. So it is not just the UK state pension that goes into the calculation, it includes private pensions from all sources unless you had SS deducted from those earnings, or the pension is derived solely from personal contributions. If your company contributed to your pension in anyway whatsoever then it goes into the WEP calculation. The only pensions that I know of that escape being used in the WEP calculation are those that are the results of Free Standing Additional Voluntary Contributions, FSAVCs, Additional Voluntary Contributions, AVCs, or Voluntary NI’s.

Anyone with a UK pension subject to WEP that exceeds approximately $12K per year is going to hit the maximum WEP regardless of the UK State Pension.

durham_lad Jun 3rd 2021 8:52 pm

Re: How are Voluntary Class 2 NICS recorded on your UK NI statement
 

Originally Posted by Glasgow Girl (Post 13013686)
Yes, the SS amount is reduced not the foreign pension. The point was that the WEP calculation will aggregate all foreign pensions based upon earnings on which SS was not deducted and use that total to determine how much WEP to deduct from SS. So it is not just the UK state pension that goes into the calculation, it includes private pensions from all sources unless you had SS deducted from those earnings, or the pension is derived solely from personal contributions. If your company contributed to your pension in anyway whatsoever then it goes into the WEP calculation. The only pensions that I know of that escape being used in the WEP calculation are those that are the results of Free Standing Additional Voluntary Contributions, FSAVCs, Additional Voluntary Contributions, AVCs, or Voluntary NI’s.

Anyone with a UK pension subject to WEP that exceeds approximately $12K per year is going to hit the maximum WEP regardless of the UK State Pension.

exactly my position.

However, I will have 28 years of SS contributions so the WEP hit should be pretty small.


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