Deficiency notice letters are issued by HMRC’s National Insurance (NI) Contributions Office to employed persons whose earnings and NI contributions have not been sufficient in a particular tax year for that year to count as a ‘qualifying year’ i.e. one that earns state benefit entitlement.
The letters invite payment of voluntary Class 3 contributions to make up the shortfall. Class 3 contributions count only for state pension and bereavement benefits entitlement, not short term benefits such as incapacity benefit. Over four million deficiency notices were issued for 2004/05.
There were two main issues with the letters. Firstly, some were sent to individuals who had sufficient - even substantial - earnings. Although the employer’s P35 and P14s for 2004/05 were submitted on time, the forms had not been processed following the problems with the introduction of employer efiling. Inevitably, where this occurred, every employee of a business received a letter in error. By now most affected employees should have received a further letter confirming that the correct contributions have been posted to their NI Account.
Secondly, for others where there is a genuine deficiency for 2004/05, or indeed any other year, there is now a dilemma. Current rules require specified amounts of earnings or NI credits in 90% of the years in a persons working life (broadly for 44 years for a man and - for now - 39 years for a woman) in order to get a full rate state pension. The issue is further complicated as between 2010 and 2020 the state pension age for women is being gradually increased to 65 so the number of qualifying years a woman needs will gradually increase to 44 years (90% of 49 years).
However, this may all change as the Pensions Bill, which is making its way through parliament at the moment, proposes that the current 90% requirement will be reduced to 30 years for those reaching state retirement age from 2010. This therefore presents a difficulty for many people thinking of paying voluntary contributions. If payment is made now, then come 2010 under the new rules it could easily prove to have been unnecessary.
No refunds would be given under such circumstances so rather than pay now, affected individuals may prefer to wait a year or so until the legislation is passed and matters become clearer. This will result in any contributions then paid for 2004/05 being due at a slightly higher rate but this is perhaps better than paying now in the knowledge that it may become a wasted payment.
Please get in touch, if you or your employees, would like to discuss your options.