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What does the end of 'contracting out' mean for employer NI contributions?

Jenny Stone explains how changes to the state pension, which will result in the end of contracted-out schemes, affect GP employers.

Q. Is it true that contracted out national insurance contribution scheme has been abolished with effect from April 6, 2016?

On 6 April 2016 the current basic state pension and state second pension was replaced by a single-tier state pension. Before rule changes in 2012, employees were allowed to ‘contract out’ of the second state pension in exchange for lower national insurance (NI) contributions. Employers also paid lower NI contributions for these staff.

The end of the second state pension means the end of contracting out as of 5 April 2016. 

If an employee was contracted out, their employee’s Class 1 NI contributions on earnings between £670 and £3,336 per month was 10.6% as opposed to 12%. For the employer, the Class 1 NI contributions on earnings between £671 and £3,336 per month were 10.4% instead of 13.8%.

Therefore if you have staff who were contracted out, their employee’s national insurance contributions will increase resulting in less take home pay for them and for you, as their employer, the cost of employing them will increase.

For example, if an employee was earnings £25,000 and was contracted out, their employee’s NI contribution would increase by £20 per month and the cost to you would increase by £48 per month, so the additional cost per year for this employee would be £576.

It is advisable to review all staff to see who are contracted out and calculate that the additional cost of the employer’s NI contributions.

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