How to navigate your way through NI maze

Closer to the truth is the fact that the nation's records have been in chaos for decades.

Millions could be losing out on their state pension entitlement because National Insurance contributions made in good faith were never accredited to their account, according to an All Party Parliamentary Group on Taxation at Westminster.

The group, chaired by Ian Liddell Grainger, asked a series of parliamentary questions about missing or "unmatched" National Insurance contributions, to discover that over the past five years alone, 9,319,823 people have not been credited with their correct contributions, worth 1.2 billion.

But HMRC moved quickly to reassure employees and pensioners that a records mismatch did not automatically mean lost pensions.

A spokesman said: "It is nonsense to suggest that millions of people lose out. No one should have a reduced pension. There are all sorts of checks and balances in the system to make sure people get the pension they have contributed to."

All very reassuring until we remember the catalogue of blunders to have beset HMRC over recent years, from tax credits to PAYE errors. The only way to be sure your records are in order is to keep an eye on them yourselves. But National Insurance is a labyrinth which even tax and pensions experts struggle to navigate.

We try to answer your questions in language you can understand.

What are National Insurance contributions?

National Insurance was first introduced in 1911 to provide working men only with some protection against illness and old age in return for a weekly contribution from their wages.

This was greatly expanded in 1945 with the introduction of the welfare state. Today all employees earning more than 5,044 pay Class One NI, which is an 11 per cent deduction of their earnings above that threshold, up to 43,888, where the NI rate falls to 1 per cent on earnings above.

From April, the lower threshold increases to 5,304, removing some of the lower paid from the contribution. However, the rate increases to 12 per cent, and to 2 per cent for earning over 42,484.

The self-employed pay Class Two and Class Four NI. Class Two is a 2.40 weekly flat contribution and Class Four an 8 per cent levy on the same bands of earnings as employees. They should pay less overall than employees on the same earnings, but they do not qualify for an earnings-linked state pension, or for job seekers' allowance.

From April, Class Two goes up to 2.50 weekly, but Class Four contributions do not kick in until earnings reach 7,225 per year, at which point they will go up to 9 per cent. Contributions on higher earnings are the same as for employees.

What are these contributions for?

Technically they were designed to pay for the welfare state. However, most of these costs now come out of general taxation, and as such NI is just another form of tax.

Importantly, there is one area where your contributions are vital, and that is when it comes to claiming your state pension. Men used to have to prove they had contributed for 44 years and women for 39 years to qualify for a full state pension, currently 97.65 weekly. Any gaps in your contribution cut the pension significantly.

The rules changed last April so that only 30 years of contributions are now required to qualify for a full state pension. This may mean that the odd few mismatched contributions will not be such a disaster. However, for women or others whose NI contributions are already patchy, this may still be a cause of concern.

How does it work?

Everyone in the UK has a unique National Insurance number, which should be sent to them automatically just before their 16th birthday. This is effectively their life-time account. Contributions must be made under this number and credited as such.

Employees must give the correct number to their employer when they start work. The employer then makes deductions and informs the Revenue of which contributions should be credited to which number.

So what are the problems?

They are obvious and numerous and have been from the very start. For many years the entire process was manually inputted. Errors can creep in at many points.

Staff may not hand the correct NI number to their employer in the first place. David Heaton, a tax partner at Baker Tilly, said: "People do not understand their NI numbers and how important they are. Sometimes they transpose a number when they hand it to their employer. Sometimes they give completely the wrong number either innocently or knowingly.

"Employers have no means of checking that they have been handed the correct number. There is an NI number tracing service but it takes months and months. An employer wants to get a new member of staff on his books as soon as he can."

For decades, this number was then written by hand on to a paper form which was sent off at the end of the tax year to the records office - in those days in Newcastle.

That system has now gone, with new contributions logged by computer. However, mistakes can still happen if people give in the wrong number or there is an inputting error at any point.

Some employers can be negligent when it comes to employees' records and contributions. In other cases, where firms are getting into trouble, record-keeping becomes a very low priority. The NI contributions at collapsed firms are often found to be in a complete mess.

What should consumers do?

Always keep your wage slips. This is the best evidence of your contributions at any given time. When individuals have appealed to the Department for Work and Pensions about their state pension, the burden of evidence has fallen on the employee to prove that the contributions were made.

Providing this evidence is not easy for employees. It is supplied by employers to the government on a P14 form. This is essentially the NI information given on P60s handed to employees at the end of each tax year, and on P45s if you have changed job during the year.

What does HMRC say?

It says "non-matches" occur when employers do not complete the P14 form correctly, so HMRC is unable to match contributions to employees.

But a spokesman stressed the contributions are not lost, but placed in a "suspense" account. HMRC staff manually intervene to match the records where possible. This will involve contacting the employer and getting them to correct the mistake, or if that's not possible, writing to any employee when a gap in contributions appears in their records. The DWP also writes to those approaching retirement advising them to get a pensions forecast and check NI contributions.

So there's nothing to worry about?

Hardly. While the Revenue writes to those with strange gaps on their record, it doesn't write to those paying no NI. If your contributions have gone astray completely you will not be contacted.

What's my first step to sorting this out?

Get a pensions forecast (see www.direct.gov.uk/en/Pensionsandretirementplanning/index.htm). And hunt out your old P60s and wage slips.