Your Questions

July 17, 2009 5:00 pm

Can I opt out of National Insurance?

Is it possible to opt out of UK National Insurance? I am British and, along with my Australian wife, work in the UK but we are planning to emigrate and retire to Australia – so do not plan to be here to draw our state pensions.

Mike Kenyon, partner at accountants Ernst & Young, says that, generally, individuals cannot opt out of the National Insurance contribution (NIC) system if they are employed or self-employed in the UK. But, even if you are living abroad when you reach UK pension age (currently 65 for men, 60 for women), you are entitled to a UK state pension based on your UK NIC record.

Class 1 NICs are compulsory for employees earning more than £110 a week, while the self-employed pay Class 2 and Class 4 on their earnings/profits above similar thresholds.

Employees can elect to have some of their NICs rebated into a “contracted out” workplace or personal pension – thereby opting out of the UK’s Second State Pension.

Foreign nationals working in the UK can also be exempted from NICs for 52 weeks as long as they have been assigned to work temporarily in the UK by an overseas employer for no more than three years.

In addition, citizens of the EEA (European Economic Area) and some other countries (including the US – but not Australia) who come to work temporarily in the UK may, in certain cases, opt out of the UK system and continue to pay social security in their home country. A form E101 should be obtained in the home country – it exempts the person from paying social security in the UK.

You automatically stop paying NICs at UK pension age even if you continue to work here. By contrast, if you are not working and under UK pension age then NICs are simply not payable. You may, however, “opt in” and pay voluntary Class 3 NICs to enable you to satisfy the contribution conditions for certain UK benefits – such as the basic state pension.

As is the case with UK residents, the UK state pension you would be able to claim if you moved and retired abroad would depend on your NIC record. Individuals who reach UK pension age on or after April 6 2010 will require 30 qualifying years to be entitled to the maximum pension (currently £95.25 per week). Those reaching UK pension age before April 6 2010 will require 44 years to qualify fully.

But you will only receive the yearly index-linked increases in the UK state pension if you are then living in EEA countries, in Switzerland or in a country with which the UK has a social security agreement that includes state pensions (the US, for example). Otherwise the UK state pension is frozen at the level when you retire. This would be the case if you retired to Australia.

The UK has social security benefit agreements with Canada and New Zealand but you will still not get annual increases in state pension once you have ceased to be ordinarily resident in the UK. The social security agreement between the UK and Australia ended on February 28 2001. That agreement allowed periods of UK residence to be treated as periods of residence in Australia in claims for Australian Old Age Pension, and vice versa in claims for the UK basic state pension and bereavement benefits.

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