Contracted out – reduced rate National Insurance

If you are in a company pension scheme, you could pay a reduced rate of National Insurance. The reduced rate for people with a company pension scheme is called the contracted out rate. There is a contracted out rebate of 1.4% for employees.

For example, this means that the standard rate of National Insurance applied to earnings between the Primary Threshold and the Upper Accruals Point (£146 per week and £770 per week respectively in 2012/13) for contracted out employees is 10.6% rather than the usual employees’ rate of 12%. From 6 April 2012, the rebate does not apply to Money-purchase schemes.

The key points are:

1)    If you are eligible to pay the contracted out rate, your company pension scheme replaces the second state pension.

2)    If you incorrectly pay the lower contracted out rate, then you could face a bill later

3)    If you are a member of an appropriate pension scheme but are not paying the lower contacted out rate of National Insurance, then you are over-paying National Insurance. There are time limits for claiming refunds

If you are unsure whether you should be paying the contracted out rate of National Insurance, you should contact your employer’s payroll or Human Resources office.

There is also help available for employees by phoning the HMRC Contracted-out Helpline on 0845 915 0150

More information on contracted-out schemes can be found at http://www.hmrc.gov.uk/faqs/nicqcoeg.htm