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HMRC internal manual

National Insurance Manual

Class 1 structural overview from 6 April 2003 to 5 April 2009: structural changes: primary contracted-out NICs

NIM01105 explains the changes to the structure of Class 1 NICs from 6 April 2003 introduced by the National Insurance Contributions Act 2002.

Although section 8 of SSCBA 92 was amended to allow for the introduction of a new primary liability on earnings above the Upper Earnings Limit, section 8(3) SSCBA 92 continues to allow the amount of primary Class 1 NICs due to be altered under section 41 and 42A of the Pension Schemes Act 1993 (PSA 1993).

Sections 41 and 42A PSA 93 provides that where earnings are paid to or for the benefit of an earner in respect of an employment which is contracted-out employment, the amount of any primary contribution due on those earnings can be reduced. This reduction is commonly referred to as the contracted-out rebate. NIM01017 provides further guidance on contracted-out employment.

The National Insurance Contributions Act 2002 also amended PSA 93. The amendment restricts the contracted-out rebate by providing for it to operate only on Class 1 NICs payable at the main primary percentage.

This means that employees in contracted out employment will pay:

  • a reduced main primary percentage on so much of their earnings paid in a tax week in respect of their contracted-out employment as

 

  • exceeds the Primary Threshold (or the prescribed equivalent) but
  • does not exceed the current Upper Earnings Limit (or the prescribed equivalent) and

 

  • the additional primary percentage on so much of the earner’s earnings as exceeds the Upper Earnings Limit (or the prescribed equivalent)

For the tax year 6th April 2003 onwards:

  • the main primary percentage for employees in contracted out employment is 9.4% and
  • the additional primary percentage is 1%.

Note that the contracted-out rebate can never apply to the additional primary percentage.