Importance of maintaining full NIC record
Entitlement to a full state pension is contingent of having paid, or been credited with, sufficient NIC. The number of qualifying years needed for a full state pension depends on the date on which state pension age is reached. To ensure that this record is maintained, many contractors pay themselves at least a minimal wage as even a salary up to the NIC Lower Earnings Limit is the point at which State Pension Credit starts to be ‘earned’.
Any shortfall in a person’s NIC record can be made up paying voluntary contributions to ‘buy’ additional years. This is what Stephen Arens attempted to do when he realised there was a dramatic deficiency in his own NIC record but HMRC refused to allow him to do so, so he appealed to the First Tier Tax Tribunal.
Background
From 1965/66 – 1973/74 Mr Arens was employed.
Arens was self-employed from 1974/75 – 2014/15 except for a period of unemployment running from the start of the tax year 1989/90 and ending in the tax year 1994/95.
When he became self-employed, Arens registered for income tax purposes with the Inland Revenue (now HMRC) and engaged accountants throughout his self-employment, even when he was unemployed.
All of his income tax and Class 4 NIC liabilities were paid but he did not pay Class 2 NIC after he became self-employed. Arens said that he was not aware of any deficiency in his NIC record until he contacted the Pensions Service approximately two weeks before his 65th birthday.
Mr Arens’ NIC record
Arens paid Class 1 NIC on his employment income 1965/66 – 1973/74. Department of Health and Social Security (DHSS), as it was then, sent Arens’ details of his contribution record for 1968/69, 1969/70 and 1973/74 as there were some minor shortfalls. Arens however did not make good the shortfall.
At the time he became self-employed there was no obligation on self-employed earners to register with the DHSS. They were, however, required to obtain and stamp a contribution card to show payment of Class 2 NIC and to surrender that card at the end of the contribution year. There was no record of Arens having done this for 1974/75.
The system of recording NIC was computerized from 6th April 1975 and, at the same time, Class 4 NIC were also introduced. Arens was not recorded as self-employed on the DHSS electronic record when records were transferred into computerised form because the DHSS had not received a contribution card for 1974/75.
During the period 6th April 1975 – 5th April 1996, self-employed earners were required to register separately with the DHSS and subsequently with the Department of Social Security (DSS) but there was no record of Arens having done so.
Following the collapse of his business in 1989/90, Arens came to the attention of the authorities although he was not entitled to claim unemployment benefit and not even if he paid Class 2 NIC 1974/75 – 1989/90. In that same tax year, Arens notified the DSS of a new address and subsequently a notice setting out details of his NIC record was sent to him.
Arens was also sent notices advising him of his NIC shortfalls for the periods 1989/90 – 1995/96 but Arens did not respond to these. No further notices were sent to him after 1995/96. At no point could Arens recollect receiving any notices from the DHSS/DSS detailing the deficiencies in his contribution record.
HMRC’s NIC decision
Arens reached state pension age on 12th November 2014 but contacted the Pension Service two weeks before his 65th birthday. After being initially told that he was entitled to a 60% basic state pension, this was reduced to 43% following a review that had discovered certain credits had been wrongly attributed to his record for the periods between his 60th and 65th birthdays.
He was advised that he should have paid Class 2 NIC for the 1994 to 2014 years but that it was too late to do so for years prior to 5th April 2008.
A bill for £946.15 in respect of Class 2 NIC for the period 6th April 2008 – 5th April 2014 was sent to Arens, which he duly paid. This ensured that the number of qualifying years increased from 13 to 19 and resulted in an increased pension of 63% of a basic state pension.
In August 2015, HMRC sent a notice of decision to Arens which confirmed he could not pay Class 2 NIC for the period 4th March 1974 – 3rd February 1990 and 28th August 1994 – 11th April 2008, on the grounds that any such contributions would be outside the prescribed time limits and, if paid, would be treated as not having been paid for the purposes of any contributory benefit. Whilst HMRC was satisfied that Arens’ failure to pay contributions was down to his ignorance or error, nevertheless he had failed to exercise due care and diligence.
A review of the decision simply upheld HMRC’s view and so Arens appealed to the tribunal.
Tribunal’s findings
All parties accepted that Arens’ failure to pay Class 2 NIC was due to his ignorance or error for the purposes of the NIC regulations. However, the tribunal recognised that Arens was not a professional man but rather a tradesman with little financial or legal expertise. He had appointed an accountant to handle his tax affairs and honestly believed he was paying the correct amount of tax and NIC. He was not aware of the distinction between Class 2 NIC (fixed weekly rate) and Class 4 NIC (levied on business profits).
Whilst Arens could not completely absolve himself of his duty to maintain his NIC record, for a man in his position, he had demonstrated the relevant level of diligence by using an adviser.
As soon as he was aware of the shortfall in his contribution record he took steps to rectify it. In the tribunal’s view Arens “slipped between the gaps in the system”. He was to be regarded as having exercised due care and diligence and permitted to make the additional contributions.
Surely Mr Arens accountant is at fault here for failing to point out what NICs he needed to pay?