NIM02281 -
Class 1 NICs: payment for leaving a defined benefit pension scheme
or for giving up a right in such a scheme
Sections 3(1)(a) and 6(1) Social Security Contributions and
Benefits Act 1992
Paragraph 2(a) of Part 6 of Schedule 3 to the Social
Security (Contributions) Regulations 2001
One way in which an employer can provide retirement benefits
for their employees is by setting up an occupational pension
scheme. Broadly, there are two types of such schemes:
- defined benefit scheme (“DBS”;
also known as a final salary-related pension scheme); and
- defined contribution scheme
(“DCS”; also known as a money purchase scheme).
Typically, a DBS pays a pension that is based on the
employee’s length of service and the amount of their final
salary. In a DCS, the amount of pension is based on the amount
contributed by the employer and/or employee plus the investment
growth of those contributions.
Because the cost of providing a pension via a DBS is met by the
employer, over the past few years, such schemes have become
increasingly expensive. This is especially so as an employer is
responsible for making good any deficit in the funding of the
pensions.
As a result, many employers are closing – either entirely
or solely to new members - their DBS in favour of a DCS. In
addition, in order to encourage members (whether current or former
employees) of the DBS:
- to transfer the value of their benefits in
the DBS into either a DCS scheme or some other registered pension
arrangement of the member’s choice; or
- to give up some right under the DBS whilst
remaining a member of it – for instance, giving up the right
to future increases in the rate of pension payable by the DBS,
some employers are offering such members a cash payment.
Employers (or former employers) may:
- refer to such cash payments to in a
variety of ways: cash inducement; “one- off” cash
payment; ex-gratia payment; immediate cash sum; (additional) (cash)
compensation payment; additional payment; and supplementary cash
payment.
- make the payment direct to a member (by
cheque or bank transfer, for instance) or directly to a DCS scheme
or some other pension arrangement of the member’s
choice.
However it is referred to, such a payment is:
- “earnings” within the meaning
of section 3(1)(a) (see
NIM02010); and
- liable for Class 1 NICs under section 6(1)
when paid direct to a member. In this respect, it makes no
difference if the member is no longer, at the time the payment is
made, an employee of the employer providing the DBS – see
NIM02015.
But where the employer (or former employer) makes payment direct
to an alternative registered pension scheme (see
NIM02715):
- the payment is disregarded in the
calculation of earnings by virtue of paragraph 2(a) of Part 6 of
Schedule 3 to the Social Security (Contributions) Regulations
2001
- on the grounds that it is a payment to a
registered payment scheme (see
NIM02716).
