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An Employer Contracted-Out Number (ECON) is the reference number allocated to a contracted-out pension scheme operated by an employer or group of companies. The ECON must be shown on the employer's P35 Employer Annual Return. A P35 must be completed for each PAYE scheme.
Employers with more than one contracted-out pension scheme for the employees included in a single PAYE scheme have a reporting problem because the P35 only has space to quote one ECON.
In earlier newsletters, we reported HMRC's requirement, starting with the 2006/07 tax year, for employers with more than one ECON for employees in the same PAYE scheme to set up a new PAYE scheme for each additional ECON. This requirement prompted numerous complaints from employers, especially from those who have acquired several pension schemes and would find themselves having to split their payrolls into small groups of employees, with resulting additional costs.
The situation is now clearer as a result of discussions between Karen Thomson, Head of Policy and Research at the Institute of Payroll Professionals (IPP), and HMRC. The following article was written by her for the IPP and is reproduced with her kind permission.
ECONs - the true story
Background
When HMRC announced that for every Employers Contracting Out Number (ECON) held by an employer a separate PAYE reference was required, members quite rightly expressed their concerns.
IPP members reported that some employers may need to set up as many as thirty PAYE schemes. This would involve both extra costs and administration for them. Initially, HMRC's reaction was that this should not be the case, as in their view only a small number of employers would be affected. However, I pointed out to HMRC that this did not fit with our understanding. So we sat down together to talk it through and it turns out that both HMRC and the IPP were correct. You ask how this is. Let me explain.
On becoming contracted-out an employer is given an ECON. This number is unique and must be quoted on the employer's P35 End-of Year Return (to validate payment of a lower contracted-out rate of National Insurance). Separate to this the contracted-out pension scheme is given a Scheme Contracted Out Number (SCON). HMRC retains information of all ECONs and SCONs issued and also of how they are linked. For example all Local Authorities share the same ECON but as each one operates their own schemes these are given individual SCONs. The SCON identifies the individual pension scheme, and the ECON the employer/scheme administrator.
Over the years a number of merger and acquisitions or TUPEs have taken place, which in essence means that one employer that has an ECON takes over another. If this other employer also has a contracted-out scheme it too will have an ECON (and SCON).
The issue identified
Where an employer, who operates a contracted-out scheme, acquires or merges with another employer who operates a contracted-out scheme, whilst the pension schemes can continue to operate separately, only one ECON should be used for future reporting/End of Year Return purposes. An example is shown below;
- Joe Bloggs and Company has an ECON, SCON and PAYE reference number.
- They then buy Joe Steel and Company which also has an ECON and SCON.
- Joe Bloggs and Company should inform HMRC that the Joe Steel and Company ECON is no longer required and that all employees contracted out under Joe Steel and Company now fall under the Joe Bloggs and Company ECON.
This of course would result in one ECON and one PAYE reference.
The notification procedure
In such cases future End of Year returns should be made quoting only the ECON of the parent company/employer.
A check should be made to see if the employer who has been bought out is listed as a participating employer on the contracted out certificate of the parent employer (in this example, Joe Bloggs and Company). If they are not, then form CA7306 should be completed to update the contracting out certificate. This will normally be completed by the pension administrators of the pension scheme.
The completed CA7306 should be submitted to HMRC APSS Nottingham.
In addition, the pensions administrators should complete schedule form CA1609 to cover each individual employee who was previously contracted out with the employer that was bought out. In the above example the CA1609 should be completed for all employees who were previously employed by Joe Steel.
The completed CA1609 should be submitted to HMRC NICO Newcastle.
Both the CA7306 and the CA1609 can be found at www.hmrc.gov.uk.
There are occasions when, albeit very infrequently, two ECONs may be required. An example would be where there are a group of companies, all operating on an independent basis under their own ECONs, but one payroll is operated in respect of all of them. In these circumstances, my understanding is that the payroll department would almost certainly be operating more than one PAYE reference.
Conclusion
The Contracting-Out process is a complex one, and so the above information is a brief summary of what is required. But, hopefully, it has helped improve your understanding and appreciation.
It is important that our pension colleagues follow the correct procedures and keep the payroll side informed, which in turn will ensure that when the payroll department is preparing to submit year-end returns the issue of more than one ECON should not arise in the future.
Please can you liaise with your pension administrators where you think that you may have more than one ECON to check to see if this should be the case.
HMRC has a helpline number - 0191 22 50264 which you or your pension colleagues can call to discuss your company's circumstances. This help-line is specifically for employers who believe that they should have more than one ECON, The help-line is open 9am -5pm Monday to Thursday and 9am to 4.30pm on Friday.
I would like to thank HMRC for their co-operation in sorting this important issue out for IPP and Pension Faculty members.
...back to 21 September 2006 |
For Payroll and Human Resource Professionals
