Employers need to understand what happens to an employee’s national insurance contributions once they reach state pension age and how to ensure the correct treatment is applied.
There are around 1.2m people still working beyond state pension age in the UK.
Once an individual reaches the state pension age, they stop paying Class 1 primary national insurance contributions (NICs). However, employers do not benefit from a similar relief, meaning that the employer must continue to pay Class 1 secondary contributions in the normal way in respect of employees over the state pension age.
The NIC exemption for employees operates by reference to the date on which an employee is paid. Any earnings that are due to be, and actually are, paid after the individual reaches state pension age are not subject to NICs. However, the following remain subject to NICs as usual:
- Any amounts paid before the employee reaches state pension age.
- Any amounts paid after they reach state pension age that should have been paid before they reached it (eg salary which is paid late).
See below for more detail on what happens in the week or month an employee reaches state pension age.
What should employers do?
Employers need to update their payroll records once an employee reaches state pension age to ensure that they stop paying NICs. This is done by changing the employee’s National Insurance category letter to ‘C’ in the payroll system.
Identify the state pension age
Individuals no longer reach state pension age on a set birthday. Instead, the date when state pension age is met will vary depending on when the individual was born and (in some cases) their gender.
For example, a woman born on 31 August 1953 would have achieved state pension age on 6 November 2017 when they were 64 years, 2 months and 6 days old, but a man born on the same day would have achieved state pension age on 31 August 2018 on their 65th birthday.
By contrast, a person (whether woman or man) born one year later on 31 August 1954 will not achieve state pension age until 6 July 2020 when they are 65 years, 10 months and 6 days old.
Therefore, you need to be very careful and before making any changes:
- use the GOV.UK calculator to check the employee’s state pension age; and,
- get proof from the employee that they have reached that age.
Employees can deliver proof by providing you with their birth certificate or passport.
Alternatively, if the employee would prefer not to provide you with these documents, they can write to HMRC to request a letter which can be shown to you instead. This letter will confirm that the employee has reached state pension age and therefore does not need to pay NIC anymore.
The employee may be requested to send their birth certificate or passport (or certified copies) to HMRC for verification if the Revenue does not already have a record of the employee’s date of birth.
Employees can also provide a certificate of age exception (CA4140) as proof if they already have one, though these certificates are no longer being issued by HMRC.
When an employee reaches state pension age
It’s likely that most employees will not achieve state pension age on a day which coincides exactly with the date that they are paid. So what happens when an employee reaches state pension age part of the way through a pay period?
It’s important to remember that when you change an NI category it will apply for the whole of that pay period. You therefore have to be careful in deciding when to change an employee over to category C.
The right time to change to category C will depend on when the employee reaches state pension age in relation to the payroll processing date.
- If the employee reaches state pension age before you process their pay for a period, you can change their category at that point and they (correctly) won’t pay any NICs for the whole period.
- If the employee won’t reach state pension age until after the payroll processing date, then you need to leave their category, as it is for that pay period to ensure NICs are collected. You can then change their category in the next pay period.
After you have changed an employee’s NI category to C, you should carry on reporting year-to-date information under the old category letter until the end of the tax year.
Employees who start to claim the state retirement pension (rather than deferring it) are likely to be issued with a new tax code. The reason for this is that, although the state pension is taxable, tax is not deducted from it at source. The employee’s tax code is therefore adjusted to take into account the amount of state pension that they receive. This could result in a surprising drop in take-home pay for the employee, even after taking into account the good news on the NIC front.
Finally, if you show class 1 secondary NICs on payslips it may be worth explaining to employees above state pension age that this is an amount paid by you as an employer, and not a deduction from their wages. Otherwise, they may be a little surprised if they thought their NIC days were behind them.
About Emma Rawson
Emma a technical officer with the Association of Tax Technicians (ATT). Her background is in corporation tax and she also has a focus on VAT.
She trained with Deloitte, working in both their London and Leeds offices, and also spent a short time working in a specialist consultancy firm providing advice to other practitioners before joining the ATT as a technical officer in 2017.