How ready are you and your software for the end of Contracting-out?

29 January 2016

Are you aware that FPS submissions will be rejected in 2016-17 if contracted-out categories are used?

To help us understand awareness, if you haven’t already, please take a moment to complete the CIPP Poll on our home page (bottom right)

As we draw closer to the end of contracting-out now is the time, if you aren’t already prepared, to consider your readiness for the impact on your payroll processing as a result of the removal of the contracting out NI categories.

Contracting-out of the additional State Pension on a defined benefit (DB) basis will end on 5 April 2016. This means that from 6 April 2016 employees will automatically be brought back into the State Pension scheme and will no longer be able to use a contracted-out salary related (COSR) occupational pension scheme to contract out of the State Scheme.

Eligibility for the contracted-out National Insurance contributions (NICs) rebate of 3.4% for employers and 1.4% for employees will also cease from this date.

The introduction of the new State Pension will bring with it some changes in what and how you report to HMRC:

  • from 6 April 2016 you will not be able to use your Contracted-out Salary Related (COSR) occupational pension scheme to contract employees out of the new State Pension scheme.
  • there will no longer be a requirement to report the Employers Contracting-out Number (ECON) and Scheme Contracted-out Number (SCON) details on Full Payment Submission (FPS) for tax years commencing 6 April 2016 and onward.
  • there will no longer be a requirement to separate the National Insurance (NI) earnings between the Primary Threshold (PT) and Upper Accrual Point (UAP) & UAP to Upper Earnings Limit (UEL).
  • there will be a requirement to report NI earnings between the PT to UEL as there was prior to 2009.
  • there will be one less column to complete on the form P60 which will be updated in due course and will be available on the Basic PAYE Tools or can be ordered from the Employer order line.

All HMRC systems will be amended to reflect these changes and the UAP data field will be removed from the FPS and Earlier Year Update (EYU).

All payroll software will need to be amended as going forward in to the 2016-17 tax year it has been confirmed that FPS submissions will be rejected in the event they contain contracted out NI categories.

National Insurance Categories from 6 April 2016

Contracted-out National Insurance tables/categories D, E, I, K, L, N, O and V will be replaced by Standard National Insurance tables/categories A, B, J, M, P, Q, R, T, Y and Z.

National Insurance Categories from April 2015 for employees under age 21

Contracted-out National Insurance categories I, K and V will operate for the 2015-16 tax year only for individuals who are aged under 21 and are in a contracted-out pension scheme.