Millions of workers have seen a tax increase of up to £40 a month as a result of changes to Britain’s state pension system.
More than five million public-sector employees and a further million in private companies started paying a higher rate of national insurance at the start of the 2016-17 financial year. This is because the State Second Pension – previously known as Serps – has been scrapped as part of reforms of the state pension, which came into effect on 6 April.
Paul Lewis' guide to the new flat-rate state pension.
How does this affect national insurance?
The State Second Pension (S2P) was a top-up to the basic state pension: the amount of extra pension people got depended on how much national insurance they had paid during their working lives.
Until April 2016 it was possible for workers to “contract out” of S2P: this meant they got less entitlement to the extra pension but, in return, they paid lower rates of national insurance on their earnings.
As S2P has ended, it is no longer possible to qualify for this national insurance rebate and, as a result, many workers saw their contributions increase from April 2016.
Which workers are affected?
The change hit employees who are part of company final-salary pension schemes. In this type of pension, it was often a requirement that members contract out of S2P so that employers – as well as workers themselves – could benefit from the lower national insurance rates.
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How much does this cost?
The impact of the change depends on how much you earn. Those on salaries above £40,000 faced the highest increase of nearly £40 a month.
There is also the possibility that employers will react to the loss of the rebate on their own national insurance bills by raising the contribution levels of their pension-scheme members.
This could mean that, for workers, even more take-home pay is lost in order to maintain pension funding rates at their current level.
Why are women angry about the changes to state pension age?
What about pension entitlement?
The silver lining of this change is that the workers affected – as well as many other people who reach state pension age on or after 6 April 2016 – should be entitled to a higher rate of state pension in the future.
The new scheme pays a higher weekly rate than the old basic state pension – in 2016-17 it is £155.65 compared with £119.30 for people who retired earlier – and workers who have built up sufficient years’ national insurance contributions should qualify for the full amount.
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