HMRC Mistake Threatens Self-Employed Workers’ Pensions- How to Check If You’ll Lose Out on £5,400

The issue primarily affects self-employed individuals, stemming from errors in the handling of National Insurance Contributions (NICs)—specifically Class 2 NICs.
As a result, many could fall short of the 35 qualifying years required to receive the full UK state pension, putting their long-term retirement income at risk

How the Error Happened (HMRC pension miscalculation explained)

The problem has emerged after HMRC incorrectly refunded Class 2 NICs to thousands of self-employed workers who were eligible to pay them.
According to Greg Moss, founder of Eleven.2 Financial Planning, the issue is widespread among clients who had no idea their contributions were being mishandled.

“Many people believe they’ve been contributing correctly for years,” Moss said. “But when HMRC refunds payments in error, it effectively wipes out part of your record — and that missing year can cost you dearly in retirement.”

Mistaken Class 2 NIC Refunds (core issue)

Under the UK’s system, self-employed workers must pay Class 2 NICs to maintain their National Insurance record.
However, a system error has led HMRC to refund contributions incorrectly, treating some payments as ineligible even when they should count toward qualifying years.

The mistake has gone unnoticed for months — even years — leaving many self-employed individuals unknowingly short of the required contribution total.

Financial experts warn that this oversight could have a severe cumulative effect, particularly as more people rely on state pensions as a core part of their retirement income.

Problems with Self-Employment Registration

Another factor compounding the problem is incorrect or incomplete self-employment registration.
When individuals fail to formally register with HMRC as self-employed, their National Insurance record may not update properly.
Others earn below the threshold for mandatory contributions but don’t realise they must voluntarily pay Class 2 NICs to preserve their pension eligibility.

These administrative oversights have left thousands of workers missing vital contribution credits, even though they believed their payments were up to date.

Financial Consequences for UK Workers

The long-term financial consequences could be serious. According to estimates from HMRC data and independent pension experts, the average loss per person could reach £5,400 across retirement.

For context, the full UK state pension in 2025 is expected to be £11,973 per year, protected by the triple lock. Missing even a single qualifying year could reduce your entitlement by about £342 annually, which compounds over decades of retirement.

For those already on tight budgets, that shortfall could make a real difference in covering essentials such as heating, rent, or healthcare.

The Scale of the Problem

The problem has mainly hit self-employed people, particularly small business owners, freelancers, and sole traders who rely on NICs to build up their state pension.
With over 4 million self-employed workers in the UK, experts say the issue could affect a large proportion of that group.

What’s worrying, they add, is that many are unaware of the problem until they check their National Insurance record — often years later, when it’s too late to fix easily.

Expert Warnings and Recommendations

Experts in pensions and tax compliance are urging workers to take immediate steps to safeguard their retirement savings.
Former pensions minister Steve Webb, now a partner at LCP (Lane Clark & Peacock), said regular monitoring of one’s NI record is crucial.

“Even if you’re not currently required to pay, voluntary contributions can make a significant difference,” Webb explained. “The state pension remains one of the best-value retirement benefits available, and losing qualifying years is something you can’t afford to ignore.”

The Importance of Voluntary Contributions (protecting your pension record)

Voluntary contributions allow people who missed out on paying Class 2 or Class 3 NICs to fill gaps in their record.
For self-employed individuals earning below the lower profits limit, these voluntary payments are essential to ensure each tax year counts toward pension qualification.

Filling these gaps costs relatively little compared to the long-term loss of thousands of pounds in pension entitlement.
Experts recommend checking your NI record every year and topping up any missing years through voluntary Class 2 or Class 3 payments if possible.

Lack of Clear Communication from HMRC

Financial advisers have criticised HMRC’s poor communication throughout the process.
Greg Moss said that many self-employed clients were never told their Class 2 payments had been refunded or disqualified.

“HMRC’s letters are often confusing or missing altogether,” he said. “People assume that if their payment went through, it’s all correct. Unfortunately, that’s not always the case.”

This lack of proactive communication has left thousands in the dark about their status, potentially jeopardising their pension future.

HMRC’s Response and Apology

In a statement, an HMRC spokesperson admitted the error and issued an apology to those affected.

“We’re sorry to those affected and are working hard to resolve the issue,” the statement read.

While HMRC has begun reviewing accounts and correcting errors, experts argue that systemic reform is needed to prevent similar incidents in the future.
Calls are growing for an independent review of HMRC’s refund processing system and for clearer public guidance for self-employed taxpayers.

Why Missing Just One Year Can Matter

A single missing contribution year can have lifelong financial consequences.
If you fall short of the 35 qualifying years required for the full state pension, your entitlement is reduced proportionally.
That means even a one-year gap could lower your annual pension by £342 — and over a 20-year retirement, that’s a total loss of around £6,840.

Experts warn that this issue doesn’t just affect today’s self-employed workers — but could also hit future retirees who don’t regularly check their records.

What Workers Should Do Now

To avoid losing out, workers should take the following steps immediately:

1. Check your National Insurance record via your personal tax account on GOV.UK.
2. Confirm your self-employment registration is valid and active with HMRC.
3. Make voluntary Class 2 NICs if your earnings fall below the threshold.
4. Keep documentation of all payments made to HMRC.
5. Contact HMRC if any discrepancies appear — and follow up until corrected.

By taking these proactive measures, workers can protect their long-term retirement income and ensure they receive what they’ve earned

The Bigger Picture: The Self-Employed at Risk

The issue highlights a broader concern about how the UK’s pension system interacts with self-employment.
Unlike traditional employees, the self-employed must handle their own contributions and records — a process that’s far more vulnerable to administrative errors.

Without automatic payroll deductions or employer oversight, even minor missteps can have lasting financial repercussions.
As the number of self-employed Britons continues to grow, the system’s weaknesses have become more exposed.

Political and Industry Pressure on HMRC

Pressure is mounting on HMRC to conduct a full review of how NIC payments are recorded and refunded.
Industry bodies are urging the government to simplify the process for self-employed workers and improve digital tracking systems to reduce human error.

Pension advocacy groups also want a dedicated helpline for workers concerned about their records, noting that current call wait times make it difficult to get help

The State Pension in 2025

Under current rules, the full new state pension for 2025 is projected to be £11,973 per year, following another increase under the triple lock policy.
To receive the full amount, individuals must have at least 35 qualifying years of National Insurance contributions.
Anyone with fewer years will receive a proportionate amount, while those with fewer than 10 qualifying years are ineligible entirely.

That makes it all the more crucial for workers — especially the self-employed — to ensure their contribution records are accurate and up to date.

Protecting Your Future

The HMRC error has exposed just how fragile pension planning can be when reliant on accurate administrative processes.
Experts agree that the best defence is vigilance: regularly check your records, understand your obligations, and act quickly if you notice something wrong.

As Greg Moss put it, “The cost of checking your record is nothing compared to what you stand to lose if you don’t.”

Key Facts at a Glance

Issue	Details
Average Loss	£5,400 from state pension
Annual Shortfall	£342 per missed qualifying year
Required Years	35 for full state pension
Full State Pension (2025)	£11,973 per year
Main Affected Group	Self-employed individuals

Final Takeaway

Thousands of workers now face uncertainty about their pension entitlement due to HMRC’s handling of Class 2 NIC refunds.
For many, this issue underscores the importance of personal vigilance and financial awareness.
By keeping records current, paying voluntary contributions, and checking their NI history regularly, workers can ensure they don’t pay the price for an administrative mistake.

(5) Five FAQs

Q1. What is the full UK state pension for 2025?
The full new state pension for 2025 is expected to be £11,973 per year, following adjustments under the government’s triple lock policy.

Q2. How many years of National Insurance contributions do I need for the full pension?
You need 35 qualifying years of National Insurance payments to receive the full state pension. Fewer years result in a reduced amount.

Q3. Who is most affected by the HMRC error?
The issue primarily affects self-employed individuals, especially those who paid Class 2 NICs that were incorrectly refunded or not recorded.

Q4. What can I do if I think my record is wrong?
Check your National Insurance record online via GOV.UK and contact HMRC if you spot missing years or refunded payments. Keep all payment evidence.

Q5. How can I protect my pension entitlement going forward?
Register correctly as self-employed, pay Class 2 NICs (voluntarily if under the threshold), and review your record annually to ensure all payments are recorded.