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Budget 13: Employers given power to pass on pension contracting-out costs

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Chancellor George Osborne has confirmed the Government will introduce a statutory override to allow private sector employers to pass on the cost of losing the contracting-out rebate to employees.

Giving his Budget speech today, Osborne said the Government will allow private sector employers who contracted-out to adjust pension benefits to take account of the loss of the 3.4 per cent National Insurance rebate resulting from the introduction of the £144 a week single-tier state pension in 2016.

However, Osborne said public sector employers will be forced to absorb the loss of the rebate.

He said: “Of course, if there’s no longer the old state second pension, there’s no longer anything to contract out of. For employers that means paying the same employer National Insurance as those without defined benefit schemes.

“Private sector employers can adjust their pension benefits to accommodate the extra cost. Public sector employers will have to absorb the burden, as is always the case with tax changes.”

The Budget document says: “To alleviate the impact on private sector employers, the Government has committed to legislating for a statutory override, which will allow private sector employers to cover the costs of additional NICs payments through changes to contribution rates or benefits for their existing pension schemes.”

Osborne told the BBC’s Andrew Marr Show on Sunday the Government will bring forward the introduction of the single-tier state pension from April 2017 “at the earliest” to April 2016.

Pensions minister Steve Webb confirmed the move in a statement to the House of Commons yesterday.

It will result in around 400,000 extra people qualifying for the single-tier state pension. It also means the Treasury will receive an extra £5.5bn as a result of the abolition of contracting-out.

About £3.3bn of this money will come from extra public sector employer NI contributions.

Of the rest of the revenue, around £600m is employer NI contributions from the private sector, some £1.4bn is employee NI contributions from the public sector and £200m is employee NI contributions from the private sector.

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