Abolition of contracting-out on a defined contribution basis

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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.

Further information:

PAYE update 5 – Abolition of Contracting Out on a Defined Contribution basis

Employer factsheet: Abolition of contracting out on a defined contribution basis

Tags: contracting out, NICs, PAYE, Recent Payroll News

This entry was posted on Sunday, October 2nd, 2011 at 15:36 and is filed under PAYE. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.