Top up NIC - but how do I calculate when I’ll break even in my state pension?

Mayeve

Hello

I have a work pension and when I get my state pension (very soon) I will be over the personal allowance and so will be paying tax.  Although I have over 35 years NIC upto 2019, due to being contracted out for some years and the pension changes in 2016 it turns out I don’t have enough for the full SP, I would need four more qualifying years for that. 

I’ve not worked beyond the 2018-2019 tax year, but have half a year of NI credits from claiming contribution-based Job Seeker’s Allowance, so I can top up that year reasonably cheaply and it seems sensible to do so. My inclination is to top up another year’s worth (cheapest year being just over £800), to bump up my SP a bit further, but I don’t think I want to bother topping up whole four years. 

Just to be clear, I didn’t claim any further benefits because I decided to take my work pension early, so have no further NI credits after my JSA came to an end.

I know that there is a calculator on MSE where you can see when you will break even and start to gain in the SP after you’ve made some additional contributions, but it relates only to those who won’t pay tax. Does anyone know if there is a formula I can use to make this calculation but will take into account the increased tax I’d pay when I top my NIC and increase my SP? I’ve been searching for help and scratching my head over this for some months! 

Thanks

molerat

A post 2016 year adds £6.32 at a cost of between £795.60 to £907.40, even less for a part filled year.  Simply divide the amount you pay by £6.32 to get the amount of weeks to break even in simple terms.  So £795.60 will take 126 weeks to return the capital gross.  There is obviously income tax and the annual increase to take into account but one thing is sure, nothing can beat the payback whatever your situation.  The general advice is that if you are short and not reliant on pension credit then buy the maximum available to get the maximum pension.  An annuity on the open market will pay back that £795.60 in something like 1040 weeks !

QrizB

A full year costs £907.40 and adds £6.32 a week gross.

Assuming you expect to be a 20% taxpayer, 6.32 a week gross is worth £5.056 net.

So it'll take (907.4 / 5.056) 179.5 weeks to pay back. That's just under three and a half years.

Edited as my numbers were all muddled up!

Mayeve

molerat said:

A post 2016 year adds £6.32 at a cost of between £795.60 to £907.40, even less for a part filled year.  Simply divide the amount you pay by £6.32 to get the amount of weeks to break even in simple terms.  So £795.60 will take 126 weeks to return the capital gross.  There is obviously income tax and the annual increase to take into account but one thing is sure, nothing can beat the payback whatever your situation.  The general advice is that if you are short and not reliant on pension credit then buy the maximum available to get the maximum pension.  An annuity on the open market will pay back that £795.60 in something like 1040 weeks !

Thank you for your reply, molerat. 

I think I feel a bit more reassured that others besides me think it is worth topping up even though everything over the personal allowance will be subject to 20% tax, and I suppose I can do lose out if I die before getting to the point where I break even and start to benefit from the increase 🙂. 

But while I’m willing to pay out around £1200 to gain top up the SP by around £13 per week (as of April 2025), I am reluctant to fork out near £2k for another £13. I can afford it but it still feels like a lot of money. 

Mayeve

QrizB said:

A full year costs £907.40 and adds £6.32 a week gross.

Assuming you expect to be a 20% taxpayer, 6.32 a week gross is worth £5.056 net.

So it'll take (907.4 / 5.056) 179.5 weeks to pay back. That's just under three and a half years.

Edited as my numbers were all muddled up!

Many thanks, Qrizb.

That does seem straightforward enough. If I’m adding 1.5 years of voluntary contributions in order to get 2 qualifying years worth of pension, presumably I’m going to break even and start to reap the benefits a little earlier? This seems to make sense to me but you’ll have to forgive me for seeking clarification as my brain is tired from spending hours these past couple of days on various other calculations around my work pension and prospective State Pension! 

Ayr_Rage

Also don't forget the instant rate of return.

I topped up 6 years at a cost of £4893.20 and that returns £1977.25 per year, a gross return of 40.4%

At my tax rate of 42% (thanks SNP) that's still 23.4%, way above any rate on a cash deposit.

Payback for me will be 4 years and 4 months assuming tax doesn't change.

molerat

Mayeve said:

But while I’m willing to pay out around £1200 to gain top up the SP by around £13 per week (as of April 2025), I am reluctant to fork out near £2k for another £13. I can afford it but it still feels like a lot of money. 

It is still well worth it, if you can afford it just do it !  

MrsM and myself paid out £6.5K between us prior to our retirements in 2019 & 2021 and we are well in profit now.

Mayeve

Ayr_Rage said:

Also don't forget the instant rate of return.

I topped up 6 years at a cost of £4893.20 and that returns £1977.25 per year, a gross return of 40.4%

At my tax rate of 42% (thanks SNP) that's still 23.4%, way above any rate on a cash deposit.

Payback for me will be 4 years and 4 months assuming tax doesn't change.

Now you’ve got me considering forking out nearly £3k so as to get the full 4 years that I’m short! I should decide quickly as I know the cost of voluntary contributions will go up after 1st April. 

And I admire/ feel a bit dim that you and Qrizb found it so straightforward to work out when you get the payback for the ‘investment’ taking tax into consideration.

One other thing, I don’t know if you know the answer, but when I spoke to HMRC I told them I would be topping up 1.5 years (costing £1,198). They have given me their bank details and the reference number I need to use for the bank transfer. Does it matter if I do change the amount but don’t forewarn them?

molerat

The 18 digit reference relates specifically to what you have told them you want to pay so to change that you need a new code.

Mayeve

molerat said:

The 18 digit reference relates specifically to what you have told them you want to pay so to change that you need a new code.

I feared as much. After I spoke to Future Pensions they put me through to HMRC, so no hanging on the line for ages. If I decide to pay more I’d better get comfortable with a cup of tea and a biscuit to make the call! 

On-the-coast

the only time it's not worth buying all available necessary years is if the last one you purchase only doesn't add a full £6.32.
BTW you realise all those figures will be increasing in a few months?