Policy paper

National Insurance contributions: reporting requirements for employers on the abolition of the contracted-out rebate

Published 11 January 2016

Who is likely to be affected

Employers.

General description of the measure

The Pensions Act 2014 implements the new State Pension and also abolishes the contracted-out rebate from 6 April 2016. A consequence of this change is that employers will need to report less earnings information to HM Revenue and Customs (HMRC) when making Real Time Information (RTI) returns.

Policy objective

Legislation prescribes the information that employers are required to report to HMRC for the purposes of calculating contributory benefit entitlement and administering the National Insurance contributions (NICs) system.

The objective is to only collect NICs information that is needed for these purposes. The abolition of contracted-out rebates from 6 April 2016 provides an opportunity to simplify RTI returns by removing information that HMRC no longer requires.

Background to the measure

In January 2013 the Department for Work and Pensions published a white paper: The Single-tier pension: a simple foundation for saving with proposals for a simpler State Pension. It included proposals to abolish the reduction in contribution rates (known as the contracted-out rebate) payable by employees and employers who were in a Contracted-out Salary Related occupational pension schemes (COSRs). The Pensions Act 2014 which received Royal Assent on 14 May 2014 abolished the rebate from 6 April 2016.

HMRC need to make consequential changes to NICs legislation to reflect that certain earnings information will no longer be required from employers and to remove reference to contracted-out employment when NICs calculations are made. HMRC has publicised the changes in guidance to software developers and employers.

Detailed proposal

Operative date

The changes will come into force from 6 April 2016 and apply to the contributions paid in the 2016 to 2017 and future tax years.

Current law

Not contracted-out Class 1 contributions are payable at the main rate of 12% by employees on earnings above the Primary Threshold (£155 per week) and by employers at 13.8% on earnings above the Secondary Threshold (£156 per week). Employees with earnings between the Lower Earnings Limit (£112 per week) and the Primary Threshold don’t pay any NICs but are treated as if they have done so for contributory benefit purposes. The rates of NICs payable are specified in the Section 8 and 9 of the Social Security Contributions and Benefits Act 1992 and the Northern Ireland equivalent.

Section 41(1) (reduced rates of Class 1 contributions), 42A(1) (reduced rates of Class 1 contributions and rebates and 45(1) (amount of minimum contributions) of the Pensions Act 1993 enable employers with employees in COSRs to receive a rebate of 3.4% and employees to receive a rebate of 1.4% on earnings over the same range.

The rebate is calculated on earnings between the Lower Earnings Limit (£112 per week) and the Upper Accrual Point (£770 per week). Those employees who are contracted-out will receive a COSR pension instead of the State Second Pension which is capped to earnings up to the Upper Accrual Point. Working age benefits such as Employment and Support Allowance and Jobseeker’s Allowance still use earnings up to the higher threshold known as the Upper Earnings Limit (£815 per week) to satisfy the contribution conditions. In order to be able to calculate entitlement to benefits earnings information has to be provided by employers in various bands.

Paragraph 7(13) of Schedule 4 and 4A of the Social Security (Contributions) Regulations 2001 (SSCR) provide that employers must report the following earnings information:

• earning up to the Lower Earnings Limit
• earnings between the Lower Earnings Limit and Primary Threshold
• earnings between the Primary Threshold and Upper Accrual Point
• earnings between the Upper Accrual Point and Upper Earnings Limit

Proposed revisions

With the abolition of the contracted-out rebate and the introduction of a flat rate pension there is no longer any need for the Upper Accrual Point to cap the State Second Pension calculation. Employers will no longer need to report the earnings up to the Upper Accrual Point separately. However, employers will still need to record earnings up to the Upper Earnings Limit as earnings above this level do not count for contributory benefits and employees pay the additional rate of NICs at 2% above this point.

Paragraph 7(13) of Schedule 4 and 4A of the SSCR will be changed so that employers must report the following earnings information:

• earning up to the Lower Earnings Limit
• earnings between the Lower Earnings Limit and Primary Threshold
• earnings between the Primary Threshold and Upper Earnings Limit

Changes are also being made to remove the need for employers to report the Scheme Contracted-out Number and Employers Contracted-out Number as they will no longer be needed once contracted-out contributions are abolished.

Consequential changes are also needed to various regulations in the SSCR to remove references to contracted-out contributions and simplify the administrative rules for calculating whether someone has overpaid contributions and the refund due when the person was contracted-out.

Summary of impacts

Exchequer impact (£m)

2015 to 2016	2016 to 2017	2017 to 2018	2018 to 2019	2019 to 2020	2020 to 2021
+/-	+/-	+/-	+/-	+/-	+/-

This note focusses on the employer and HMRC impacts of the changes to reporting requirements arising for the abolition of contracted-out. These changes are not expected to have an Exchequer impact. The increase in NICs rates arising from the abolition of the contracted-out is covered in the Pension Act 2014 impact assessment.

Economic impact

These changes to the information that employers have to report are not expected to have any significant economic impacts.

Impact on individuals, households and families

These changes to NICs reporting alone are not expected to have any negative financial impact on individuals, households or families.

The measure is not expected to impact on family formation, stability or breakdown.

Equalities impacts

There are no impacts on any groups which share a protected characteristic.

Impact on business including civil society organisations

This measure is expected to have a negligible impact on businesses and civil society organisations. The changes will need to be incorporated into all employer’s payroll process, but this will be part of annual updates to National Insurance parameters. The changes lead to a reduction in the volume of information reported to HMRC for all payroll operators. It will no longer be necessary to separately report earnings up to the Upper Accrual Point, or contracted-out earnings; reducing the number of national insurance categories. However, as the vast majority of payroll calculations are processed automatically on-going savings are estimated to be negligible.

Operational impact (£m) (HMRC or other)

There will be no significant operational impacts on HMRC. Although there will marginal savings as the calculation of refunds will be simpler without contracted-out contributions. Errors by employers are also expected to fall because the system is simpler.

None.

Other impacts

Other impacts have been considered and none have been identified.

Monitoring and evaluation

These changes will be monitored and assessed alongside other tax changes.

Further advice

If you have any questions about this change, please contact Hasan Mustafa on Telephone: 03000 586718 or email: hasan.mustafa@hmrc.gsi.gov.uk.

Declaration

David Gauke MP, Financial Secretary to the Treasury has read this tax information and impact note and is satisfied that, given the available evidence, it represents a reasonable view of the likely costs, benefits and impacts of the measure.