Budget 2013: The government has brought forward an increase in national insurance contributions (NICs) for employers with contracted-out defined benefit (DB) pension schemes by a year.
The move results from Chancellor George Osborne’s confirmation in his 2013 Budget speech that members of a DB scheme will no longer be able to contract out of the State Second Pension from 2016/17. This means that both they and their employers will no longer be entitled to pay lower NICs.
To alleviate the impact on private sector employers, the government has committed to legislating for a statutory override, which will allow private sector employers to cover the costs of additional NIC payments through changes to contribution rates or benefits for their existing pension schemes.
Malcolm McLean, consultant at Barnett Waddingham, said: “We eagerly await the government’s consultation on how companies will be able to amend their pension schemes to mitigate these costs.
“Of course, the costs will be offset a little (by £2,000 per employer) but only the smallest employers will probably notice the difference.”
Will these nic changes to DB schemes affect pensions already in payment? Will pensions in payment become subject to nic contributions?
Pension schemes and individual employees have long been able to contract-out of the second state pension and make separate arrangements, in exchange for reduced rates of national insurance (NIC).
However, contracting out of money purchase schemes was abolished in April 2012, and with it the 1.4% employer’s NIC rebate. Contracted out defined benefit (DB) pension schemes continue to attract a 3.4% NIC rebate for employers and 1.4% for employees for the time being. Employers and employees in such schemes will clearly lose those rebates when contracting out is finally abolished.
This measure is expected to raise £0.6 billion in employer NIC, and £0.2 billion from employee NIC in the private sector. A total of £1.4 billion is expected to be raised from public sector employees.
The government estimates that 90% of employees will be better off, or at least no worse off, through the increased new single pension scheme. As some small compensation, at least NIC will become easier to understand for employees and to account for by employers affected.