Contracted Out Employment

Frequently asked questions

What is contracting-out?

Contracting-out is when employees leave the additional State Pension (currently the State Second Pension; prior to April 2002 the State Earnings Related Pension Scheme (SERPS)) and join a contracted-out occupational pension or personal/stakeholder pension instead. They receive a pension from the scheme rather than the additional State Pension. To reflect this, they receive a rebate of National Insurance contributions.

I am not sure what type of scheme I run?

If you run a contracted-out occupational pension scheme you will have been issued with a contracting-out certificate. If you are unsure you can contact the Pension Scheme Services (PSS) in Nottingham as all types of schemes should be registered.

What type of National Insurance contributions should I be deducting?

If you operate a contracting-out occupational pension scheme there are two main rates of National Insurance payable - 'D' rate for salary related and 'F' rate for money purchase.
If you have employees in an Appropriate Personal Pension scheme then 'A' rate is applicable.

What is the difference between 'D' rate and 'A' rate National Insurance contributions?

As above 'D' rate is a lower rate of National Insurance payable for members of a contracting-out salary related scheme. 'A' rate is the standard class of National Insurance payable for employees who are not-contracted out. Employees who pay 'A' rate but are contracting-out in an APP/APPSHP will receive a rebate of National Insurance paid directly to their pension provider.

One of my female employees is continuing to work after 60 and is deferring her state pension. I run a contracted-out occupational scheme what rate of National Insurance should I deduct?

Once a person reaches State Pension age (SPa) they are no longer liable to pay any National Insurance contributions (NICs). However if they continue to work you need to pay category 'C' rate NICs.

One of my female employees does not reach SPa until age 62. I run a contracted-out occupational scheme. What rate of National Insurance should I pay between 60 and 62?

A person is liable to pay National Insurance contributions up until they reach SPa. You should continue to pay the contracted-out rate of National Insurance contributions.

I do not currently operate an occupational pension scheme do I need to do anything?

If you do not currently operate an occupational pension scheme or contribute towards a Personal Pension for your employees you may have to provide access to a Stakeholder Pension scheme.

How many employees do I need before I have to offer access to a Stakeholder Pension scheme?

If you have five or more employees you have to provide access to a Stakeholder Pension scheme. Further information on Stakeholders is available from the Pensions Advisory Service.

What rate of National Insurance do I deduct for a Stakeholder Pension scheme?

If you operate a contracting-out money purchase stakeholder occupational pension scheme 'F' rate is applicable.

If you have employees in an Appropriate Personal Pension Stakeholder scheme then 'A' rate is applicable.

Can I transfer my earlier periods of contracted-out employment to my current employer?

You will need to contact your current employer's pension scheme administrator and find out if they are willing to accept the transfer of benefits into their scheme. You may also wish to seek independent financial advice.

I am currently contracted-out with an Appropriate Personal pension. However I wish to contract back into SERPS how can I do this?

You should either contact you Pension Provider or you can complete a form CA1543 which can be downloaded from the HM Revenue & Customs Internet site.

My Age Related Rebate (ARR) was a lot lower for last year. Should I contract back-in?

We cannot provide advice on whether or not someone should contract-out. You should receive information from your pension provider on an annual basis which you should review and take independent financial advice.

I no longer wish to operate my occupational pension scheme what do I need to do?

You need to contact Elections Section at PSS in Nottingham. They will let you know what you need to do to surrender your contracting-out certificate.

What options will be available for the members of the scheme?

Once Elections Section have received the necessary documentation that the scheme is ceased they will notify Scheme Cessation in National Insurance Services to Pensions Industry. Scheme Cessation will send a list of members to the scheme administrator which will also include the options available. Full details can be found in leaflet CA15 - Cessation of Contracted-out Pension Schemes (PDF 1.6MB) or CA85 - Cessation of Stakeholder Pension Scheme Manual (PDF 297K).