Press release

Quinquennial review of contracted-out rebate rates

This news article was published under the 2010 to 2015 Conservative and Liberal Democrat coalition government

The Government has published details of the contracted-out rebate rates that will apply from 2012.

The Government has published details of the contracted-out rebate rates that will apply from 2012. The new rates have been laid in a draft Order today.

It is a legal requirement for the rebate rates to be reviewed at least every five years.

Pensions Minister Steve Webb said:

I welcome the Government Actuary’s report on contracted-out rebates and accept their best estimate approach.

The current reduction in National Insurance contributions is provided at considerable cost to the tax payer. The Government has a duty to ensure that the rebates are set at a level which is fair to all, and that the rates are not seen to favour those who are contracted-out of the State second pension.

The key rates that have been set out relate to defined benefit occupational (final salary related) schemes.

At the moment if an individual is contracted out of the State second pension, the employer and the employee pay National Insurance Contributions reduced in total by 5.3%.

The new rebate will mean that from April 2012 if an individual is contracted out, the employer and the employee pay National Insurance Contributions reduced in total by 4.8%.

These decisions are based on the Government Actuary’s report.

Notes for Editors

  1. The rebate Order was laid in draft today (3 February 2011) along with:
    • The Explanatory Memorandum to the Order.
    • The Report by the Government Actuary on the Review of rebates and reduced rates of National Insurance contributions for members of defined benefit contracted-out pension schemes.
    • The Report by the Government Actuary on the Review of rebates and reduced rates of National Insurance contributions for members of defined contribution contracted-out pension schemes.
    • The Report by the Secretary of State for Work and Pensions in accordance with sections 42(1) and 45A(1) of the Pensions Act 1993 on the Order.
  2. For the tax years from 2012 to 2017, the Government proposes that the rebate for defined benefit schemes should be 4.8%. This will be split 3.4% for employers (secondary Class 1 contributions), 1.4% for employees (primary Class 1 contributions).
  3. The rebate Order contains figures to enable the calculation of rebates for members of defined contribution contracted-out schemes for the tax year 2012-13. While it is planned to abolish contracting out on a defined contribution basis from 6 April 2012, the legislation enabling this change will not be brought into force until 2012.  As such the requirement to review defined contribution rebates every 5 years remains. As these figures are not expected to be used, they have only been provided for one tax year.