From 6 April, national insurance costs for many will increase by 1.4%, which is set to save the Treasury £5.5bn a year
More than 6 million workers will suffer an unexpected pay cut from next month due to a little-noticed change to state pension rules that will net the Treasury almost £5.5bn a year.
The move will also push up costs for many employers, including schools, hospitals and GP practices.
From 6 April a sizeable chunk of the UK workforce will see their national insurance costs increase by 1.4%, which translates into a deduction from their pay of up to £37 a month. This change was announced in the March 2013 budget but is only taking effect now.
The move is linked to the introduction next month of a new flat-rate state pension, which will replace what the government said was a “mindblowingly complicated” existing system. Those reaching state pension age on or after 6 April 2016 will get the new regular payment, which has been set at £155.65 a week.
As part of the shake-up, the state second pension – also known as S2P and formerly known as Serps – will be abolished. As a result, members of defined benefit workplace pension schemes will no longer be permitted to “contract out” of the state second pension. At the moment these workers and their employers pay national insurance at a lower rate – but this will end from next month.
This affects millions of people: there are 1.3 million active members of contracted-out private sector schemes, plus a further 5.4 million members of public sector pension schemes. The vast majority of the public sector pension scheme members are currently contracted out, said Tom McPhail, head of retirement policy at investment and pension firm Hargreaves Lansdown.
“All these people are about to see their national insurance costs increase by 1.4%, which could mean a monthly deduction from their pay of up to an additional £37.31 a month in national insurance,” he added.