Earnings Factor Calculation

SnowMan

Sixtiesman wrote: »

Hi Mr. Snowman,
I thought that I had become a Diploma standard Serps and NIC student under your excellent tutorship but I find I have to come crawling back as I find myself stumped.

:rotfl::rotfl::rotfl:

When a person left a contracted-out company scheme within 5 years of service (reduced to 2 years for dates of leaving from 6/4/88) it was common for them to receive a refund of contributions. In addition they were bought back into SERPS. A CEP (Contributions Equivalent Premium) was paid by the employer to the Contributions Office of HMRC which represented the saving in employee and employer national insurance over the period of employment with a few adjustments. The employee usually received a refund of contributions less the CA (Certified Amount) less 20% tax. The CA represented the employees share of the NI saving. It meant they were roughly speaking no better or worse off than had they been contracted into SERPS throughout and never been a member of the scheme.

The payment of the CEP meant that the employee was effectively treated as if they had not contracted-out of SERPS over that relevant employment where the refund was paid.

Now remember the additional state pension payable is SERPS (calculated as if the person had always contracted-in for all employment periods regardless of whether you were contracted-in or out) less GMP (but only for periods where the person was contracted-out).

In calculating the GMP to deduct in this calculation you should ignore the periods (i.e ignore the earnings factors) where a CEP was paid because the GMP has been extinguished by the payment of the CEP. However the SERPS (calculated as if the person had always been contracted-in) should still include these periods. Of course that means you accrue full SERPS for the period where you got paid the refund.

I am not sure what you mean by overlap. If you mean tax years where you received a refund for (say) the first 6 months of the tax year (and contracted-back into SERPS by payment of a CEP) but were contracted-out for (say) the last 6 months of the tax year (through an occupational scheme) and did not receive a refund then effectively a split calculation is required i.e. GMP calculation only includes half a year's earnings

Sixtiesman

Hi Snowman,

(I seem to be having trouble with sending replies you may have already received this message)

I think that I phrased my question a little loosely. What I meant to ask was:

Taking my P60 for 1979/80 as an example it has the following NIC detail:-

Total of Employer's

---

Employee's----Employee's Contribs.
and Employee's

---

Contribs.

---

at C/O Rate included
Contribs payable

---

payable

---

in previous column.

796.58

---

248.60

---

182.72

---

I thought that after being Contracted-back in by CEP my NICs for 1979/80 should be 248.60 as above. However, when I do the calculation I get the figure of 290.81. What am I doing wrong?

Regards,

Sixtiesman

SnowMan

I think you have misunderstood what those figures are on the P60.

Remember you only contracted-out of SERPS in relation to earnings between the LEL and UEL. However employee national insurance was paid on earnings from the first £1 upwards (or at least it was the case all those years ago, it isn’t now of course)

The figure of £248.60 is simply the total employee national insurance paid. And the difference between that and £182.72 represents national insurance at the full rate on earnings UP TO the LEL.

You can tie it in. As the LEL was £1014 in 79/80 and the employee full NI rate 6.5% (as opposed to the contracted-out rate on earnings above the LEL of 4% after the 2.5% rebate), the national insurance on earnings up to the LEL would be £65.91 (=1014 x 0.065). And £65.91 + £182.72 = £248.63 which is almost spot on.



When a CEP was paid it didn’t mean that your employee NI for the year changed. You have already paid your NI and they don’t make a retrospective adjustment to the figure on the P60.

However HMRC got their money back for giving you back your SERPS by charging your employer a completely separate amount representing the savings in national insurance by contracting-out and in, and that is of course the CEP. And then the employer recouped your share of the saving, the CA by deducting it from your refund of contributions.

The payment of the CEP also passes on the message to HMRC, that in calculating your GMP, to exclude earnings factors for the period covered by the buying back into SERPS.