Are you a high-income earner in Canada? If so, are you required to make second CPP contributions? The Government of Canada recognizes that saving for retirement isn’t always easy, especially with high inflation.
As a result, second CPP contributions went into effect at the beginning of 2024. Although contributing more to CPP has the potential to increase your payouts during retirement, you might notice less take-home pay. In this article, we’ll cover the basics of second CPP contributions, including who qualifies and how the additional amount is calculated.
What are Second CPP Contributions?
Beginning on January 1, 2024, second CPP contributions require high-earning Canadians to contribute more to the CPP. Contributing excess funds to the CPP allows individuals to receive an increased amount of CPP retirement pension, post-retirement benefits, disability pension, and survivor’s pension when they retire.
Second CPP contributions are not the same as CPP enhancement. CPP enhancement has similar goals, requiring additional payments. However, second CPP contributions target high earners. Second CPP contributions follow base contributions and first additional CPP contributions.
Who Qualifies for Second CPP Contributions?
Second CPP contributions are based on your earnings, creating two ceilings. The first earnings ceiling is $68,500 for the 2024 year. This ceiling, commonly known as the year’s maximum pensionable earnings, determines how much you ordinarily contribute to the CPP.
Individuals who make more than the first earnings ceiling will be required to make second CPP contributions. The second ceiling will be 7% more than the first earnings ceiling, or $73,200, for the 2024 tax year. However, beginning in 2025, this percentage increases to 14% above the first ceiling.
If you earn less than $68,500, you aren’t required to make second CPP contributions. Instead, you are limited to base and first additional CPP contributions, which is at a rate of 5.95% for employees and employers, and 11.9% for self-employed individuals.
How are Second CPP Contributions Calculated?
Second CPP contributions are calculated as a flat percentage of wages above the first earnings ceiling. Employees contribute 4% with a 4% employer match. Self-employed individuals are required to contribute the full 8%. You are only required to contribute up to the second ceiling. If you were to earn more than $73,200 in 2024, your contribution base would still be capped at $4,700, or $188.
What happens if you find yourself between the first and second earnings ceiling? Your contributions are limited to the amount of earnings over the first ceiling. For example, let’s say that you earn $71,000 during the year. Your second CPP contribution base would be $2,500. Assuming you weren’t self-employed, you and your employer would both contribute an additional $100.
Summary
Are you required to make second CPP contributions? Despite being required for most high-earners, CPP contributions can help you secure higher payments during retirement. For more information on second CPP contributions and what they mean for your tax filings, reach out to a team member at NRK Accounting. We can walk you through everything you need to know.