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HMRC internal manual

National Insurance Manual

Class 1 structural overview from 6 April 2009: background

Section 22, SSCBA (1992)

In the 2007 Pre Budget Report the Chancellor announced a change to the State Second Pension to bring forward the introduction of the Upper Accrual Point (UAP) to 6 April 2009. The Upper Accrual Point is a new threshold for the calculation of both State Second Pension and contracted-out NICs rebates. For State Second Pension and rebate calculations only, it replaces the Upper Earnings Limit (UEL).

The Pensions Act 2007 made provision for the Secretary of State for DWP to prescribe a date to abolish the option to contract out for members of defined contribution schemes (Money Purchase Schemes and Appropriate Personal Pension Schemes) and introduce the UAP to achieve a simpler, flat rate S2P by around 2030.

This meant that from 6 April 2009 employers and employees with occupational pension schemes contracted out of S2P received contracted-out rebates on earnings between the Lower Earnings Limit (LEL) and UAP. Employees will pay NICs at the not contracted out rate on earnings between the UAP and UEL. Employers will pay NICs at the not contracted out rate on earnings above the UAP.

An additional column is included on the P11/P14 or their equivalents used by employers to show this band of earnings. Only earnings up to the UAP are used to calculate S2P rights and so this information needs to be provided by employers in their annual return for the 2009/10 tax year onwards.

Employers who do not have occupational pension schemes will also have to record the earnings between the Primary Threshold and UAP and UAP to UEL. This was because they may have employees in pension schemes into which HM Revenue & Customs make minimum payments which will also be limited to the UAP on and after 6 April 2009.

Liability to pay primary Class 1 NICs continues to arise:

  • only when the earnings are placed unconditionally at the employee’s disposal ((but special rules apply for certain avoidance type earnings see NIM04000)
  • only when the earnings exceed the Primary Threshold
  • in the earnings period in which the earnings are paid.

From 6 April 2012, anyone in a personal or stakeholder pension scheme or a contracted-out money purchase (‘defined contribution’) occupational pension scheme are no longer contracted out of the State Second Pension and will be liable to pay NICs at the Not contracted-out (full) rate.