Senior Policy Liaison Officer Chartered Institute of Payroll Professionals
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Abolition of NICs for under 21s

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13th Apr 2015
Senior Policy Liaison Officer Chartered Institute of Payroll Professionals
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It was announced in the 2013 Autumn Statement that from April 2015 there would be no employer National Insurance Contributions (NICs) due on earnings up to the upper earnings limit for employees under the age of 21, says Diana Bruce of the CIPP.

The NICs relief applies to both existing employees and to employers taking on new staff and no individual’s state pension entitlement will be affected by the measure.

The removal of the requirement for employers to pay Class 1 secondary NICs aims to encourage youth employment and boost economic development. It is estimated that employers will save more than £500 for every under 21 year old earning £12,000, (more than £1,000 if earning £16,000) and around 1.5 million under 21 year olds will be lifted out of employer NICs completely, with an average saving of £355 per employee.

At the time the change was announced, the payroll profession welcomed the generous timeline, giving software developers adequate time to ensure changes were made to accommodate the new NICs categories. And with any change whether short or long-term (we don’t know which this is to be) payroll processes need to be amended to ensure employees are put on the correct NI letter.

Class 1 National Insurance thresholds 2015-16

Lower earnings limit (LEL)

£112 per week

£5,824 per year

Primary threshold (PT)

£155 per week

£8,060 per year

Secondary threshold (ST)

£156 per week

£8,060 per year

Upper accrual point (UAP)

£770 per week

£42,385 per year

Upper secondary threshold (UST)

£815 per week

£42,385 per year

Upper earnings limit (UEL)

£815 per week

£42,385 per year

The rate of secondary Class 1 NICs for employees under the age of 21 on earnings between the ST and UST will be 0%.

The Social Security Contributions and Benefits Act makes employers liable to Class 1 secondary NICs on all earnings paid to employees over the age of 16 provided the earnings exceed the secondary threshold (ST).

A new upper secondary threshold (UST) has been introduced to accommodate the NICs exemption. The value of the UST for the 2015-16 tax year is the same as the UEL, however the UST has no statutory link to the UEL so may not be aligned in subsequent years.

For earnings which exceed the UST, secondary class 1 NIC applies, currently 13.8%. The exemption only applies to Class 1 secondary contributions so employees will have to pay Class 1 contributions on any earnings above the primary threshold (PT) in the normal way.

Only Class 1 NICs are affected by the change, not Class 1A or 1B. So if an employee is in receipt of a taxable benefit; for example a company car, the employer will still be liable for the employee’s Class 1A NICs on that benefit.

New NI category letters

M

Not contracted-out standard rate contributions for under 21

Z

Not contracted-out deferred rate contributions for under 21

Y

Mariners not contracted-out standard rate contributions for under 21

P

Mariners not contracted-out deferred rate contributions for under 21

V

Mariners Contracted-out Salary Related contributions for under 21

I

Contracted-out Salary Related standard rate contributions for under 21

K

Contracted-out Salary Related deferred rate contributions for 21

The three new letters relating to ‘contracted-out’ schemes will be removed after ‘year one’ in line with the removal of all contracted out letters, linked to the new state pension which will be introduced in April 2016.

Calculation examples

Various workshops and forums were set up last year to engage employers, agents and payroll providers. Feedback from these workshops included that employers want validation - the age of an employee must match the appropriate category letter and where it does not the software should flag this issue prior to submission. Also suggested was that if possible an automated solution to be used, with NI category letters changing to the new appropriate letter automatically for existing employees under 21. Alternatively, the software should prompt the user to change to the new appropriate NI category letter. It was also pointed out that category letters should change to the appropriate NI category letter automatically when an employee reaches the age of 21 or the software should prompt the user to change to the appropriate NI category letter.

As a result of the discussions within these meetings, HMRC produced examples to provide an overview of how calculations will work. Examples include various director’s calculations with equivalent pre and post earnings levels, holiday pay, holiday across tax years, mistimed payments and contracted-out rebates.

Speak to your provider to ensure your payroll software can accommodate the necessary changes.

Apprentices

It was announced in the 2014 Autumn Statement that this NI relief will be extended further from April 2016, to include all apprentices under the age of 25. There will no doubt be further NI category changes as a result of this extension which will coincide with the removal of several categories due to the introduction of single tier pensions. So ensuring the correct NI category is being used for all employees from April 2016 could be a burdensome task so let us hope that payroll software can cope with all the changes.

Diana Bruce is a senior policy liaison officer at the CIPP.

Replies (3)

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By the_Poacher
15th Apr 2015 07:24

So complex
Have I understood this correctly? This government forces older people to work for longer before they can draw their meagre pension. The same government then has to give incentives to employers to take on young people?

Thanks (1)
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By NYB
15th Apr 2015 12:47

Doesn't help many of my micro c clients with under 21's employees as they tend to be more casual/student jobs where NIC isnt triggered anyway.

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By carnmores
15th Apr 2015 17:38

@the poacher

sadly not.....

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