Up to 6 million people will pay more National Insurance from this month.
The increase, which could reduce take-home pay by up to £40 a month, is linked to the new state pension system.
Contracting out ends
Contracting out, whereby it has been possible to opt out of the state second pension in exchange for lower National Insurance contributions, ended in 2012 for employees who belong to a defined contribution (DC) pension scheme, the vast majority in the private sector. These employees already pay National Insurance at 12%.
Until 6 April 2016, those who belong to a defined benefit (DB) ‘final salary’ scheme can pay a lower rate of National Insurance (10.6%) if they are ‘contracted out’ of additional state pension. It is estimated that around 5.4 million public sector employees and 1.3 million private sector workers fall into this category.
From 6 April onwards, all employees will be obliged to pay National Insurance at 12% (on earnings between £8,060 and £43,000).
The increase is forecast to bring in an additional £5bn a year for the government.
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New state pension begins
If you reach state pension age on or after 6 April 2016, your state pension will be determined by a new single-tier system, which replaces the current combination of basic state pension and additional state pension (SERPS/S2P).
The move to a single-tier system is responsible for the end of contracting out – and the withdrawal of the lower (rebated) national insurance rate of 10.6%.
Once all employees pay National Insurance at the same rate, each qualifying year will entitle them to 1/35 of the new state pension (you need 35 qualifying years to get the full amount).
National Insurance contributions made before 2016 still count towards state pension, but only those made at the full rate bring full entitlement.
Years in which you paid lower rate National Insurance – because you were contracted out – will result in a reduced state pension entitlement.
The reduction can be offset by subsequent years at full rate, but older workers who were contracted out may find their state pension entitlement is significantly less than the headline figure of £155.65.
Check your entitlement
The transition period between two-tier and single-tier state pension will last for decades and means that individuals need to check their entitlement carefully.
Pension rights you have accrued under the pre-2016 system will not be lost (and may entitle you to more than £155.65) but those built up after 2016 cannot result in more than full state pension.
To check your current position, contact the Pension Service and request a state pension statement.