Small business owners and people with “side hustles” risk missing out on state pension benefits if they filed their tax return after January this year, HM Revenue & Customs has warned.
HMRC this year extended the self-assessment deadline from January 31 to February 28 due to concerns that the pandemic would make it difficult for individuals and accountants to submit tax returns in time.
Around 1.8m people subsequently did not file their return by the end of January. However, it has emerged that people who pay voluntary class 2 National Insurance Contributions (NICs) and did not file a return by January could miss out on key state benefits unless they contact HMRC now.
The problem arises because HMRC’s systems do not allow Class 2 NICs to be counted if a tax return is filed after January, the tax office said in a technical note to accountants.
Glenn Collins, head of policy and technical advisory at the Association of Chartered Certified Accountants (ACCA), a professional body, said: “Small business owners have recognised the importance of making these contributions towards a full state pension, but many may now lose out because they are confused by HMRC’s actions and don’t have professional advisers to help them.”
Class 2 NICs are commonly paid by small business owners and those with an extra job or “side hustle”. People whose net profits are below a threshold of £6,365 do not have to pay the contributions but many do in order to protect their entitlement to benefits, including the state pension, bereavement benefits, maternity allowance and contributory employment and support allowance (ESA).
Accountants said people might not notice the gaps in their national insurance contribution record until pension age. This could affect their entitlement to the full state pension and lead to losses of thousands of pounds over decades.
The ACCA said the problem could have been pre-empted if HMRC had responded sooner to concerns raised from November 2020 about the difficulties people were having in meeting the self-assessment deadline.
“Had HMRC listened and acted quickly there would have been time to work through the details and consequences such as making sure people’s voluntary national insurance contributions are counted,” Collins said.
HMRC said it had delivered many measures “at a fast pace” to help those affected by the pandemic, including delaying the charging of late filing penalties for those struggling to file on time.
“Unfortunately, working at speed meant that we could not put in place an alternative method of collecting voluntary Class 2 National Insurance contributions,” HMRC said. “We are sorry to those affected for the inconvenience caused and would urge anyone who made voluntary Class 2 NICs and filed their tax return after the deadline to contact us. We will also contact affected customers ourselves when possible.”
Helen Thornley, technical officer at the Association of Taxation Technicians, a professional body, said it would have been too difficult for HMRC to overhaul its Class 2 NICs system during the pandemic. However, she urged the tax office to do more to communicate directly with individuals affected by the problem, many of whom she said may be “blissfully unaware” of the need to take immediate action.
“I think that the messaging needs to be much clearer that it’s HMRC’s systems that doesn’t allow you to pay voluntarily after January 31 via [self-assessment], but you still very much can pay voluntarily. You just need to use a different method [by calling HMRC’s helpline],” Thornley said. “All messaging also needs to make clear the specific consequences to gaps in your record.”
Those affected include people who pay or have paid voluntary class 2 NICs and filed their latest tax return after January 31. They may also have mistakenly received a refund from HMRC of the voluntary Class 2 NICs they had paid. They might have logged on to their personal service account and found no Class 2 NICs are shown for the 2019/20 year.
Others may have received a message from HMRC, reading: “I have corrected your self assessment because you did not pay the Class 2 National Insurance shown on your tax return by January 31. It is now too late to pay voluntary Class 2 National Insurance through your tax return. You can find out how to pay this at GOV.UK’.
HMRC said those who could be affected should telephone 0300 200 3500.