Warning over HMRC tax error that could leave thousands worse off – what to do NOW to avoid missing out
THOUSANDS of taxpayers could be left worse off due to a recent HMRC tax error.
The Low Incomes Tax Reform Group (LITRG) warns that the error, acknowledged by HMRC, could strip self-employed workers of crucial National Insurance-related benefits like the state pension.
The issue centres around the payment of voluntary Class 2 National Insurance contributions (NICs) that can be made by self-employed taxpayers with profits under £6,725.
These voluntary contributions are usually paid by taxpayers as part of their self-assessment return and must reach HMRC by January 31, following the end of the tax year.
HMRC then automatically transfers the NICs to the taxpayer’s NI record to be counted towards their entitlement to benefits such as the state pension and other employment, as well as maternity and bereavement benefits.
However, it appears this year that HMRC did not initiate the transfer until after the January 31 deadline.
In some cases, this resulted in the voluntary contributions of up to £163.80 being rejected and refunded automatically to affected taxpayers, according to LITRG.
If no action is taken, this could mean that taxpayers miss out on a qualifying year of NICs.
An HMRC spokesperson said: “We apologise to those affected and are working to resolve this issue as a matter of urgency.”
It’s unclear how many taxpayers are affected, but it’s understood to be in the thousands.
LITRG is now calling on HMRC to identify and contact those affected to make them aware of the issue and arrange for the voluntary Class 2 NICs to be paid and properly reflected on their NI record.
In the meantime, taxpayers who have received a refund of their voluntary Class 2 NICs but who want to retain their qualifying year for NI purposes for 2022/23 should phone HMRC’s NI helpline on 0300 200 3500.
Antonia Stokes, LITRG’s technical officer, said: “This appears to be an unfortunate error by HMRC that may impact certain low-income self-employed workers who have tried to keep their entitlement to NI-related benefits up to date in the 2022/23 tax year.
“The issue is unique to the year in question, and our advice to those who might be affected is to first check to see whether they have received a refund from HMRC.
“If they have, or if the taxpayer is unsure, they should contact the NICs helpline to determine their position and, if necessary, make a special payment directly to them.”
SUN MONEY SAYS
ANALYSIS by James Flanders, The Sun’s Chief Consumer Reporter:
As the backbone of the UK economy, self-employed workers already face a myriad of challenges.
However, the fact thousands are now at risk of losing out on valuable NI credits could have a drastic effect on their state pension forecast.
HMRC’s error disproportionately affects those on the lowest incomes – owners of companies that make less than £6,725 a year in profit.
The government “scrapped” Class 2 NICs in April – meaning those whose profits hit £12,570 more a year no longer have to pay but automatically qualify for the national insurance credits, which contribute to their state pension entitlement.
Brits need 35 NI years to qualify for the full state pension.
Unfortunately, self-employed individuals with profits below £6,725 in do not get Class 2 NICs and don’t benefit from credit.
However, they can choose to pay Class 2 NICs voluntarily at the standard rate (£3.45 per week) to preserve their entitlement to those contributory state benefits.
However, if you’ve made a voluntary contribution and paid for Class 2 NICs in the year affected by HMRC’s error it’s vital you get in touch with the department to ensure that credit is added back onto your NI history.
NATIONAL INSURANCE BASICS
National Insurance is a tax all workers must pay once they earn a certain amount of money.
Contributions go into a government pot that pays for benefits like sick pay and the state pension.
You’ll need 10 qualifying years on your NI record to qualify for the state pension.
But, you will usually need 35 qualifying years to get the full rate of the state pension.
You pay mandatory NI if you’re 16 or over and are either:
- An employee earning more than £242 per week from one job
- Self-employed and making a profit of more than £12,570 a year
Plus, you have to pay 2% on anything you earn over £967 a week – or £4,189 per month.
The exact amount you pay will depend on how much you earn, as it’s a percentage of earnings between these amounts.
If you’re employed, the company you work for deducts the tax and pays it to HMRC for you.
However, if you’re self-employed, you’ll need to complete a tax return and notify HMRC of your earnings during each financial year.
There are different types of National Insurance – known as “classes”, and the type you pay depends on your employment status, how much you earn, and whether you have any gaps in your National Insurance record.
How do I file a tax return?
TO file a self assessment tax retun, you'll need to register with HMRC first, which will then issue you with a Unique Taxpayer Reference (UTR).
You must register for self assessment by October 5 if you have to file a tax return and you have not sent one before.
You can do so by visiting www.gov.uk/register-for-self-assessment.
If you’ve previously registered and already have a UTR, you don’t need to go through this step again.
Once you’ve got your UTR, you can sign in via the “Self Assessment tax return” section of HMRC’s website by visiting www.gov.uk/log-in-file-self-assessment-tax-return.
You can then file your self assessment tax return online.
The deadline for sending a return online is January 31 every year.
If you need a paper copy of the main Self Assessment tax return, call HMRC on 03000 200 3610 and request an SA100 form.
The deadline for sending a return using a paper form is October 31 every year.
You need to pay the tax you owe by midnight on January 31 each year.
HMRC accepts your payment on the date you make it, not the date it reaches its account.
File late and HMRC will issue you with a fine.
SELF-EMPLOYED NATIONAL INSURANCE
If you’re self-employed and have profits over £12,570 a year, you’ll be liable for two types of NI:
- Class 2
- Class 4
Class 2 NI goes towards your state pension but those earning over £6,725 a year in profits automatically qualify and don’t pay a penny towards them.
If your profits are more than £12,570 a year, you must pay Class 4 contributions.
For example, in the tax year 2024 to 2025 you’ll pay:
- 6% on profits between £12,570 and £50,270
- 2% on profits over £50,270
However, if you earn less than £6,725 a year, you don’t get Class 2 NICs automatically.
Instead, to ensure that you build your NI history to make sure you qualify for the state pension, you may want to consider paying voluntary contributions to top up this up.
The Class 2 rate for tax year 2024 to 2025 is £3.45 a week.
If you’re below state pension age, check your State Pension forecast by visiting ww.gov.uk/check-state-pension to determine if you’ll benefit from paying voluntary contributions.
If the gap in your National Insurance record was between April 6, 2016, and 5 April 5, 2023, you’d pay the rates that applied in the 2022 to 2023 tax year.
For Class 2 NICs, this was £3.15 a week.
You’ll need to register with HM Revenue and Customs (HMRC) to pay Class 2 contributions.
You can do this by visiting www.gov.uk/register-for-self-assessment.
You can usually pay voluntary contributions for the past 6 years. The deadline is April 5 each year.
Once you’ve registered, HMRC will send you a payment request by the end of October telling you how much to pay.
The payment request will include an 18-digit reference number that you’ll need in order to make a payment.
If, after registering, you do not get a payment request, contact HMRC by visiting www.gov.uk/government/organisations/hm-revenue-customs/contact/national-insurance-enquiries-for-employees-and-individuals.
You do not need to contact HMRC to check your payment has been received.
It will appear on your NI record. This can take up to eight weeks.