Contracted out National Insurance contributions - Employees

If you are employed and a member of your employers Contracted-out occupational pension scheme both you and your employer will pay National Insurance contributions at a reduced rate. Occupational pension schemes can be contracted-out on a salary related (final salary) or money purchase basis.

From 6 April 1997 individuals who were members of a Contracted-out Money Purchase (COMP) scheme began to receive an additional rebate on their NICs, from HM Revenue and Customs, based on their age. This rebate is paid to the pension scheme. From the 6 April 2001 COMP Stakeholder Pension schemes receive this rebate. These payments along with any other contributions from the employer and/or member provide the member with a pension based on the value of his or her fund at retirement.

If you have an Appropriate Personal Pension (APP) or a Stakeholder Appropriate Personal Pension (SHP APP) you will pay National Insurance contributions at the full class 1 rate (A rate). HM Revenue and Customs will pay minimum contributions to the provider of your APP/SHP APP on your behalf. These minimum contributions are made up of the difference between the full class 1 rate of National Insurance contributions and the lower Contracted-out rate, and a rebate based on your age. These payments along with any contributions you have made are invested so the value of the pension paid will depend on how well the investments perform.

Further information is available relating to the different ways of Contracting–out.

National Insurance Services to the Pension Industry (NISPI), which is part of HM Customs and Revenue deals with contracted-out occupational schemes and Appropriate Personal Pension schemes.

There is a 'Contracted-out Pensions Help-Line', 0845 915 0150 or textphone 0845 9153296 which deals with specific contracted-out enquires.

You may find the NISPI Frequently Asked Questions (FAQs) useful.