£5bn tax raid to hit six million workers
New pension rules mean the average earner loses £268 a year
A HIDDEN £5billion tax raid will hit the pay packets of six million workers f rom next April.
Around one million private sector workers and 5.4million in the public sector are facing a surprise rise in their National Insurance contributions.
Workers who earn £25,000 – around the average salary – will have to pay an extra £267.80 a year.
Those on £50,000 a year will have to cough up an extra £478.92, according to official figures.
The increase is a little-known consequence of the introduction of the new state pension from April 6.
Those affected are currently contracted out of the state second pension – a top-up scheme that allows workers to earn extra retirement income.
Because these workers have opted not to qualify for this additional pension, the Treasury allows them to pay lower National Insurance.
The state second pension is to be scrapped as part of the overhaul of the main state pension, meaning that anyone contracted out will now be obliged to pay higher National Insurance contributions.
In total it will boost Government coffers by £5billion in the 2016-2017 financial year, according to figures contained in a report by the Office for Budget Responsibility.
The tax rise will surprise many workers because they never have realised that they were paying lower National Insurance. This is because most were contracted out automatically when they were put into a company pension scheme.
Malcolm McLean, of actuarial firm Barnett Waddingham, said: ‘Millions of workers are going to get a real shock next April.
‘The Government does not appear to have made much effort to explain what is happening to those who are going to be affected. But people really need to know this informa- tion to plan their retirements.’ Normally workers in f ull- time employment pay National Insurance of 12 per cent on any earnings between £5,824 and £42,385. But anyone contracted out of the state second pension – which today is only workers in a final salary pension scheme – pays 10.4 per cent.
When contracting out ends in April, all these employees will have to pay an extra 1.6p National Insurance for every £1 they earn.
Government estimates suggest that by the time the changes happen next April only around one million private sector workers will be contracted out. The 5.4million pub- lic sector workers in final salary schemes will typically be doctors, nurses, teachers and civil servants.
Employers will also have to pay extra National Insurance. At present, they are allowed to pay a reduced rate for an employee who is contracted out. They pay 10.4 per cent instead of the normal rate of 13.8 per cent. Generally this tax break is used to bolster their final salary pension fund.
Last month, in an interview with Money Mail, Pensions Minister Baroness Altmann pledged to make greater efforts to explain the changes. She said that while some employers had told their staff, some were still ‘working out what to do’.
When the new state pension was announced, workers were told that anyone who had 35 years of National Insurance contributions would qualify for the full new payout.
But last year Money Mail revealed that this was not the case. It discovered that only one in three workers would get the full £151.25 a week from next April. This is because workers who were contracted out would get a deduction from their payouts.
A Department for Work and Pensions spokesman said: ‘The vast majority of those who start to pay National Insurance at the full rate during the first 20 years of the new system will receive enough state pension over their retirement to offset the increase and any potential adjustments in their occupational pensions.’