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HMRC internal manual

National Insurance Manual

Class 3 NICs: deficiency notices: background


National Insurance and PAYE Service (NPS) automatically sends out Shortfall Letters (known internally as ‘Deficiency Notices’) to tell customers that a specific tax year is ‘not qualifying’ for basic State Pension (bSP) and bereavement benefits purposes. They give the customer the opportunity to pay contributions voluntarily or to query the details we hold on their National Insurance (NI) account.

We record contributions, credits and qualifying earnings details on the customer’s account together with an Earnings Factor (EF) for each year. NPS uses the EFs to assess whether or not a tax year is ‘qualifying’.

NPS reviews the tax year in question and checks whether the EF recorded reaches the qualifying level set for that year. NPS does not generate a DN if the EF reaches or exceeds the level. If the EF does not reach the qualifying level NPS will generate a DN in some cases to tell the customer how many weeks of Class 3 National Insurance contributions (NICs) they may need to pay in order to make up the shortfall

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Years up to 1995-1996

Prior to 1998, Class 1, 2 and 3 NICs, credits and credited earnings were recorded on the National Insurance Recording System (NIRS) now part of NPS. This information was used to determine a contributor’s entitlement to various state benefits.

Approximately 15 months after the end of each tax year, NIRS performed a scan to identify contributors who had not paid, or been credited with, enough contributions to make that year count towards their basic State Pension.

The contributors were then sent a letter known as a Deficiency Notice inviting them to consider paying Class 3 NICs on a voluntary basis to make up the shortfall. The Deficiency Notice also showed the actual amounts paid and/or credited. This enabled the individual to check that all contributions paid and/or credited had been recorded. The annual exercise was suspended in 1998 with the last of the “old” Deficiency Notices being issued in 1997 for the 1995-1996 tax year.

1996-1997 to 2001-2002

In 2003 the Inland Revenue performed a “catch up” exercise issuing Deficiency Notices for the 1996-1997 to 2001-2002 tax years. This gave contributors the opportunity to pay Class 3 NICs for these years. Because of the delay in issuing Deficiency Notices, the normal provisions for time limits and higher rates do not apply to the payment of Class 3 NICs for the 1996-1997 to 2001-2002 years. The special provisions for these years are shown at NIM25042.

2002-03 onwards

The annual Deficiency Notice exercise was been re-instated for 2002-2003 onwards. For more detailed information about the Deficiency Notice process since 2002-2003 and which customers now receive them see NIPG145005