State pension update as 'worrying' HMRC error could see these savers get less cash

Workers could lose over £300 a year from their state pension because of an HMRC error that tax experts have described as "worrying". Thousands of self-employed people have had their Class 2 National Insurance contributions (NICs) wrongly refunded by HMRC without their knowledge, according to reports. If the contribution, which is charged at a weekly flat-rate of £3.45, is refunded, HMRC treats the entire year as if no valid NIC was made; however.

Writing off a year of NIC credits could majorly impact savers - reducing their state pension allowance and affecting benefit entitlement. The new State Pension requires that workers be employed for 35 years to receive the full annual amount, of £11,973. An employee meeting the minium threshold of 10 years would only recieve £3,420.86 per year.

"One year missing would equate to around £342 less a year in state pension," Ross Lacey, director and financial planner at Fairview, told the i Paper.

Describing the largescale refund as "worrying", he added: "For those who've had their Class 2 NICs refunded incorrectly by HMRC, this will potentially impact the state pension they get in the future.

"It'll be lower, as they haven't received a credit in the years where no NI was paid. Many won't necessarily realise that the contribution has been refunded as the total amount payable is actually quite low.

"But those missed years would cost them a lot more if the problem isn't identified and addressed."

While Class 2 NICs were dropped by the Government in April 2024 in a bid to simplify the tax system for self-employed workers, those whose annual profits are below the small profits threshold can still choose to pay them voluntarily to ensure they are entitled to the state pension and associated benefits.

However, the changes have not been sufficiently publicised, Mr Lacey suggested, with a percentage of self-employed people whose income falls below the threshold unaware that they need to make voluntary contributions to ensure they receive the full pension allowance.

"Many very small businesses still do need to keep up their voluntary contributions and may mistakenly believe that they don't," he said. "It's hard for people to get good, reliable information on their position."

An HMRC spokesperson said: "We're sorry to those affected and are working hard to resolve the issue."