Staff who are members of defined benefit pension schemes (PASNAS, USS, TPS, MRC, NHS or LGPS) will see their National Insurance (NI) contributions increase from this April as a result of changes being introduced by the Government.
The increase is a direct consequence of changes to the State Pension, also being introduced at the same time, and which are designed to create a fairer pension system, making it easier for people to plan their retirement savings.
Staff who are not members of the defined benefit schemes mentioned above will not be affected and their NI contributions will remain the same.
Why is this happening?
The current State Pension is made up of two parts:
- Basic State Pension
- Additional State Pension (sometimes called State Second Pension or S2P)
Most defined benefits schemes offered in the Higher Education sector are contracted out of the Additional State Pension. Employees who aren’t members of defined benefit pension schemes pay a higher rate of NI. The majority of which contributes towards their Basic State Pension and the rest towards their State Second Pension (S2P). Employees who are members of defined benefit pension schemes only contribute towards the Basic State Pension and so their NI rate is lower.
However, from April 2016, a new State Pension will replace the existing Basic and additional State Pension and the practice of contracting-out will end. Those on the defined benefit schemes will start to pay the standard rate of NI.
How much more in NI contributions will employees have to pay?
Employee contributions will increase by 1.4% of band earnings (earnings between the Lower Earnings Limit and the Upper Accrual Point – in 2015/16 this is earnings between £112 and £770 per week).
These changes will take effect without any action from employees.
More details about the changes can be found on the Finance website.