About 1m low-paid workers in the UK are at risk of receiving a reduced state pension because of a lack of clarity from the government over its plans for a sweeping tax cut, the opposition Labour party and a former minister have warned.
Millions of low earners do not pay National Insurance but receive the benefits of doing so, including credits towards their state pension record. Currently 35 years of NI contributions or equivalent credits are required to qualify for the full state pension of £8,700 a year.
People who make fewer contributions or receive fewer credits have their pension reduced on a pro-rata basis.
In the 2019 general election, the Conservatives pledged to raise the earnings threshold at which National Insurance starts to be paid by employees to £9,500 a year, from the current £8,632.
However, the government has not said whether it will also increase the so-called lower earnings limit, the figure at which people start to receive state pension credits. If this is increased along with the NI contribution threshold, people who earn between the old and new limits could see their eligibility for credits affected and ultimately their right to a full state pension.
“It’s really important that low-income people don’t unknowingly lose out as a result of this change,” Anneliese Dodds MP, shadow financial secretary to the Treasury, told the Financial Times. “The government needs to quickly make clear whether people’s’ pension contributions will be maintained or otherwise, as a result of the change- otherwise we could see some really worrying unintended consequences”.
Steve Webb, director of policy with Royal London, a pension provider, said roughly 1m workers could lose their eligibility for state pension credits, and so a full state pension, if the lower earnings limit is increased.
“It is vital that a policy designed to benefit low earners does not inadvertently exclude them from state pension rights,” the former pensions minister said. “What matters for pension rights is the LEL and, if it goes up, then around a million people, predominantly female part-time workers, will suddenly be excluded from the [full] state pension. The government must address this issue as a priority.”
Currently, people earning between £118-£165 per week, or £6,136-£8,580 per year, do not pay National Insurance but receive credits. Those earning from £166 per week, or £8,632 per year, begin to pay NI contributions of a minimum of 12 per cent of their earnings, with credits also building towards their state pension.
Ms Dodds, who has written to chancellor Sajid Javid asking for clarity, wants the lower earnings limit kept at £118 to protect lower earners’ pension entitlements.
The Treasury said further details on the NI threshold increase would be “announced in due course”. The government has said it wants to further raise the threshold to £12,500.
The Institute for Fiscal Studies, a think-tank, has estimated that raising the NI threshold to £9,500 would mean that about 430,000 fewer people would pay NICs, and those still paying would contribute £85 less per year.