Abolition of contracting-out on a defined contribution basisSunday, October 2nd, 2011
HMRC’s latest PAYE Update reminds payroll software developers and employers of what they need to do to prepare for abolition of defined contribution contracting-out from April 2012.
It will be each employer’s responsibility in April 2012 to allocate the correct NI Table Letter to those employees affected by the withdrawal of contracting-out for all pension schemes that operate on a defined contribution (DC) basis. The schemes affected are:
- Contracted-out money purchase (COMP) schemes
- Sections of contracted-out mixed benefit (COMB) schemes contracted-out on a DC basis
- Appropriate Personal Pension (APP) Schemes and APP Stakeholder Schemes.
It will still be possible to contract-out of the additional State Pension on a Defined Benefit basis in the case of Contracted-out Salary Related (COSR) schemes. Table Letters D, E or L may not be used unless the employer holds a COSR contracting-out certificate.
Employers are directed to
- plan for the changes, if they are not already doing so
- discuss with the scheme trustees and/or their advisors how the scheme will operate following this change
- consider any scheme changes to take account of the fact that neither secondary (employer) or primary (employee) NICs rebates will be available
- communicate the pension scheme changes to their employees
- be aware that they and their employees will pay standard rate NICs rather than the reduced contracted-out rate of NICs, unless changing to a COSR scheme
- be aware that from the 2012/13 tax year NICs category letters F, G, H, K, V and S will become obsolete and should not be entered onto forms P11 or P14 in any circumstances
- ensure that the correct NI category is applied to all earnings paid after 6 April 2012
- be aware that the Scheme Contracted-out Number (SCON) field will be removed from the P14 form.
Payroll software developers are directed to discuss the points above with their employer clients and consider
- how any DC scheme will operate following this change, and
- what NIC rates will apply to individual employees following this change, dependent on individual circumstances.