NIC changes in April 2016 and the new State pension

Take home pay for public sector workers, and others in final salary schemes, will fall this month
The new State pension scheme started on 6 April 2016. As discussed in the April edition of TAXtalk, two aspects in particular may have an immediate impact.
Take home pay
Contracted out national insurance contributions (NIC) ended on 5 April 2016. These lower rates of NIC applied for individuals who were members of qualifying employer or public sector pension schemes. These were usually final salary schemes. Employees who previously paid contracted out rates will suffer an increase in their NIC rate from this month and will see their take home pay fall. Some employers have already written to their employees to warn them about this, but others may be asked to explain the change to their employees on pay day.
Prior to the change contracted out NIC was paid at a discounted rate to reflect the fact that individual scheme members did not receive any State additional pension entitlement attributable to the years they were in the pension scheme. Now that all elements of the State pension, relating to periods after 6 April 2016, will be related to the new flat rate State pension amount (for 2016/17, this is £155.65) then everyone will pay the full 12% rate from now on. The old contracted out rate for 2015/16 was 10.6% so resulting in a 1.4% increase. For those people earning over the upper earning limit, this amounts to just over £40 per month. 
The abolition of contracted out rates of NIC also affects the employer. Employers’ secondary Class 1 contracted out NIC also ended on 5 April 2016 and from April 2016, this NIC rate increases by 3.4%, from 10.4% to 13.8%. For an employee earning over the upper earnings limit the increase is over £98 per month. This could mean a material increase in cash flow for an employer’s payroll.
The Contracted Out Pension Equivalent
The second issue concerns some of the wording on the State Pension Statement. Individuals are entitled to request an estimate of their eventual State pension from the Department for Work and Pensions. The reply comes back on a standard letter, which also informs the individual of their Contracted Out Pension Equivalent (COPE). The COPE is the amount of new State pension estimated to have been foregone through having been contracted out under either a workplace or personal pension arrangement in the old regime. Note, subject to paying sufficient qualifying years, contracted out individuals will always receive a State pension equivalent to the old basic State pension.
Unfortunately confusion may arise in that the State Pension Statement letter contains the following wording in reference to the COPE amount:
‘This will be paid as part of your work place pension scheme(s). It will be paid by your workplace or personal pension scheme(s), in addition to your State pension.’
We, and also representatives from the pensions industry, have pointed out to DWP that this wording implies that the precise stated amount of COPE is paid by your pension plan. However, the amount of contracted out contributions were actually redirected to the individual’s pension plan, giving them a larger pension as a consequence. However the size of this additional pension will depend on the performance of the fund and has no direct mathematical connection to the amount of the COPE. The worry is that in the future new pensioners may ask where their COPE pension is.
Anonymous