If you currently process payroll, you should be aware that contracting-out of the additional State Pension on a defined contribution basis will be abolished from 6 April 2012. HMRC have listed the following as types of defined contribution schemes:

• Contracted-out money purchase (COMP) schemes
• Sections of contracted-out mixed benefit (COMB) schemes contracted-out on a defined contribution basis
• Appropriate Personal Pension (APP) schemes and APP Stakeholder schemes

What this means

From the start of the 2012-13 tax year, the National Insurance contribution (NICs) category letters F, G, H, K, V and S will be abandoned, and should not be used on P11 and P14 forms.

Unless alternative arrangements are made for employees to join a contracted-out salary related scheme, the employer and employees under State Pension age will have to pay not contracted-out rate NICs (category letters A, B, J, R, T and Q).

Before April, you will need to establish the correct new category letter for affected employees. HMRC have provided the following guidance:

We appreciate, however, that in most cases the need to change the employee's NICs category letter will be as a direct result of the abolition of contracting-out on a defined contribution basis. Although we cannot provide an absolute default position, to assist employers with selecting the correct NICs category letter to use from 6 April 2012 we are able to provide the following guide.

Providing there are no changes in the employee's circumstances that could affect the type of National Insurance contributions payable, (e.g. the employee is not moving into a Defined Benefit scheme; not reaching State Pension age etc) then the new category letter to use would be as outlined in the table below:

What you need to do before April

You'll need to identify if any of the employees you process are affected by the change, and work out their new category letter. You should make the change in Payroll prior to running the April payroll update. So that the abandoned category letters are not used, our April update will use the above table to change any abandoned category letters that it finds. You will need to review these changes, to ensure that the new letters are correct.

Additional information

HMRC have also provided guidance about what happens if an employee leaves a contracted-out (COMP) scheme employment before the end of the 2011-12 tax year, and receives a further payment in the 2012-13 tax year, paid within 6 weeks of leaving. Normally, this would still be treated as contracted-out earnings. The guidance they have given is that the six week rule will expire for COMP schemes (and the Defined Contribution part of COMB schemes) at 6 April 2012. Any 2012-13 earnings paid to a former contracted-out employee within 6 weeks of leaving the employment are to attract not contracted-out NICs. Therefore, you should choose the appropriate non contracted-out NIC category letter, even where the earnings arise in the 2011-12 tax year, but are not paid until the 2012-13 tax year.