This week there is confusion over whether NI contributions are higher for older workers or not, and if so, why? Esther Smith and Harry Scott advise.
We have previously looked at this. Looking through the work we produced in 2007 we came across this;
"Employers’ national insurance contribution rates are higher for workers over state pension age than for workers under state pension age under contracted-out pension schemes, this means that departments that hire older workers will face higher costs than they would have had these jobs been filled by younger staff."
The person who led this research has now left and no-one knows where this came from or if the information is true, can anyone explain why NI increases over state pension age?
Harry Scott, Partner, Mills and Reeve LLP
The point is that you cannot be contracted out of the State Second Pension Scheme over State pension age. Contracting out involves both the employer and employee having part of their National Insurance contributions (NICs) redirected into an occupational pension scheme and the scheme thereby replacing the credits in the State Second Pension, which the employee would otherwise get. This procedure does not operate under personal pension schemes and stakeholder schemes in relation to which full NICs are paid by both member and employer, and the insurance company collects the NIC rebates from HMRC at the end of the tax year.
So yes, there is an extra cost if you compare members of a contracted-out occupational scheme who are above and below state pension age. There isn't if the employee is in a Group Personal Pension or a stakeholder. It is likely that an employer could not reduce the pay of a member of staff who is over state pension age and in a contracted-out scheme because this would be age and possibly sex discriminatory.
Harry Scott, Partner, Mills & Reeve LLP
Esther Smith, partner, Thomas Eggar
I am a little confused by your question! National Insurance is not due once people pass state retirement age (which is 65 for men, and either 65 or 60 for women depending on their date of birth). Therefore, it is not correct to say that rates of NIC are higher, irrespective of whether employees are in a contracted in or out pension scheme (for the purposes of SERPS).
Hope this clarifies the situation!
Esther Smith is a partner in Thomas Eggar's Employment Law Unit. For further information, please visit www.thomaseggar.com.