National Insurance in the UK is a tax paid by employees out of their wages, employers in addition to wages, and the self-employed from their profits. While it’s comparable to a social security contribution, it is compulsory, and hence can be classified as a tax. This is in addition to income tax and there are in fact 84 ways that National Insurance differs from income tax. The most important of which is income tax is annual while National Insurance is charged on each payment you receive. Another difference is that while income tax is charged on all income, National Insurance Contributions (NICs) are only charged on wages or profits received from trade. Yet another difference is the fact that income tax is only charged to an individual while both employees and employers are expected to contribute to NICs. There are also different rates for employees and different rates for the self-employed in NICs while there is no difference in income tax rates for both.
Now the purpose of NICs is that they fund a number of benefits including the state pension, means-tested benefits, maternity allowances, bereavement benefits, jobseeker’s allowances and more. With regard to the state pension, in particular, you need to have a certain amount of NIC payments to qualify for the full state pension. That amount is counted in qualifying years and ranges from about 30-44 years, depending on when you retire. To get the full new state pension, you typically need 35 qualifying years where each qualifying year you pay 52 times the lower earning limit which is £123 * 52 = £6396. Now it is possible to miss out on some qualifying years, maybe you were unwell, unemployed, or just needed a break, or maybe even just forgot to pay it. If so, the UK government has given you 6 months to go online and fill up any gaps in your NIC contributions so that you are eligible for the full state pension when you retire.
Now the interesting thing about NIC contributions is that you think you’re putting money away for your old age but what you’re effectively doing is paying for people who are retiring right now. That’s right, the NIC works on a current need basis so when it’s your time to retire, you will be paid from the NIC contributions made by people at that time. According to HMRC, over 10,000 people have opted to make payments to fill gaps in their NIC contributions, totalling about £12.5 million, all made online through the new check your state pension forecast service. If you have any gaps in your NIC payments between 6 April 2006 and 5 April 2018, you have until 5 April 2025 to make voluntary National Insurance contributions to fill those gaps, failing which you won’t be eligible for the maximum state pension amount. Between income tax, private pension deductions, national insurance contributions, VAT, and other taxes, retirement is getting more and more expensive in the UK.
If you’ve lived and worked in the UK and have since moved or are planning to move back to India, transfer your pension fund to India through QROPS and avoid UK income tax on pension and distribution which is as high as 40%, as well as death tax which is up to 55%. Additionally, in India, there are no capital gains taxes on investments for pension funds.
QROPS FAQs
What will happen to my QROPS Pension Transfer upon my death?
As there is no death tax in India, the entire amount will be distributed to the Named Beneficiaries.
Is there a penalty for transferring my pension fund to India?
No, not only is the transfer of pension funds to approved pension schemes in India tax-free, but you also nullify any loss that would potentially be incurred due to currency exchange rates and similar complications.
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