RPSM02403040 - Employer Pages: Registering a pension scheme with HMRC: Contracting out of the state second pension scheme on or after 6 April 2006: What difference does it make if my scheme is contracted out?

What difference does it make if my scheme is contracted out?

You are setting up an occupational pension scheme yourself

If the pension scheme you have set up is to be a contracted-out occupational pension scheme, your National Insurance (NI) contributions (as employer) and those for your employees would change

• your employees would pay reduced NI contributions to HMRC, and
• you, as employer, would pay reduced NI contributions to HMRC.

Also, if your occupational pension scheme is a money purchase scheme,

• you, as employer, would also pay a monthly amount known as a "minimum payment" to the scheme trustees in respect of each contracted out employee, by the 19^th day of each month at the latest,
• HMRC will also pay an additional rebate to the scheme in respect of each employee, based on their age.

The trustees of the pension scheme would be taking on certain obligations in relation to providing this additional pension. If the employer is named as a trustee of the pension scheme in the scheme documents, this would apply to you. There are restrictions on the level of employer-related investment that can be entered into using contracted out funds.

You are selecting a personal pension or stakeholder pension scheme for your employees to join

No requirements would be placed on you, as your only involvement in the scheme is as the employer of the scheme members.

Your employees would continue to be liable for NI contributions to HMRC at the usual rate.

HMRC would pay a rebate, known as a minimum contribution, to the scheme in respect of each member. This is based on the amount of the member's earnings between the lower and upper earnings limits for National Insurance (LEL and UEL), plus basic rate tax relief on that employee's share of the rebate. The scheme then uses these rebates to provide each member with a pension, replacing the additional state pension, when that member reaches state pension age.