Sarah Bradford explains the National Insurance contributions savings to employers for employing certain types of employees.
To encourage employers to take on younger workers and those who have recently left the armed forces, National Insurance contributions (NICs) breaks are available for employers, which mean they will pay little or no employer’s (secondary) Class 1 NICs.
NICs breaks are also available for employers who have physical premises in a Freeport tax zone and who take on new employees to work at those premises.
Employing workers under the age of 21
Where an employee is under the age of 21, the employer does not pay any secondary Class 1 NICs on the employee’s earnings unless they exceed a higher secondary threshold – the upper secondary threshold for under-21s. Where earnings exceed this threshold, employer contributions are payable on the excess at the secondary Class 1 rate (13.8% from 6 November 2022).
The upper secondary threshold for under-21s is set at the same level as the upper earnings limit for Class 1 NICs. This is £967 per week (£4,189 per month and £50,270 per year) for 2022/23. It is aligned with the point at which an employee with the standard personal allowance starts paying higher rate tax.
The upper threshold applies only in respect of employer contributions; the young employee pays primary contributions to the extent their earnings exceed the primary threshold, as for other employees.
To ensure that the employer benefits from the NICs savings where they have employees under the age of 21, it is important that the correct category letter (letter M) is used. The employer should ensure that they have procedures in place to identify when the employee reaches their 21st birthday. At this point, the category letter will need to be updated (usually to letter A) as the discount is lost and the employer will now need to pay secondary contributions on the employee’s earnings where they exceed the secondary threshold (set at £175 per week, £758 per month, or £9,100 per year for 2022/23).
Apprentices under the age of 25
A similar break is available for employers who take on apprentices under the age of 25. As with employees under the age of 21, employers pay no secondary NICs on the earnings of an apprentice under the age of 25 as long as their earnings do not exceed the apprentice upper secondary threshold (AUST) which, like that applying in respect of employees under the age of 21, is aligned with the upper earnings limit (and set at £967 per week, £4,189 per month and £50,270 per year for 2022/23). It is unlikely that an apprentice will have earnings in excess of this level but if they do, employer contributions are due on the excess at the employer secondary rate (currently 13.8%).
Like employees under the age of 21, apprentices under the age of 25 pay primary contributions as normal if their earnings exceed the primary threshold.
It is not sufficient to simply call an employee an ‘apprentice’ to benefit from the break; the apprentice must meet the definition set out in the Social Security (Contributions) Regulations 2001, reg 15A. The definition includes a person employed under an approved English apprenticeship agreement within the meaning of the Apprenticeship, Skills and Learning Act 2009, s A1 (and equivalent provisions for Scotland, Wales and Northern Ireland).
Where the apprentice is under the age of 21, the NICs break for apprentices under the age of 25 takes precedence, and the apprentice should be identified by category letter H.
Again, employers should ensure that they revise the category letter when the apprenticeship comes to an end or if earlier, the apprentice reaches the age of 25.
Armed forces veterans
A new NICs break was introduced from 6 April 2021 for employers who take on armed forces veterans in their first civilian job since leaving the armed forces. The scheme was introduced to encourage employers to “look again at the unique skills and experience that former members of the UK armed forces can bring to the workplace”.
The scheme works in a similar way as that for apprentices and employees under 21 in that the employer only pays NICs on the earnings of the armed forces veteran while they are in the first year of their first post-forces civilian employment to the extent that they exceed the veterans' threshold. This, too, is aligned with the upper earnings limit (and set at £967 per week, £4,180 per month, and £50,270 per year for 2022/23). Where earnings exceed this threshold, employer contributions are payable at the usual secondary rate (set at 13.8% from 6 November 2022).
To qualify for the relief, the employee must have served at least one day as a member of any of the regular armed forces.
From 6 April 2022, relief is given through the payroll. The veteran should be identified by category letter V. For 2021/22, relief was given retrospectively – the employer paid contributions as usual during 2021/22 and reclaimed the relief from 6 April 2022 by adjusting contributions payable to HMRC.
As the relief only applies until the end of the first year of the first civilian employment since leaving the forces, the employer must ensure that the veteran’s category letter is adjusted when this anniversary is reached. From that date, the employer will pay secondary contributions on earnings in excess of the secondary threshold. If the veteran changes job in the first year of civilian employment or has more than one job, the relief is available to all employers during the period from 6 April 2021 to the one-year anniversary of the start date of the first post-forces civilian employment.
As with other similar breaks, only the employer benefits from reduced contributions; the veteran pays primary contributions on their earnings where they exceed the primary threshold as for other employees.
Freeport employees
Sites designated as Freeport tax sites offer a number of tax and NICs advantages, including a NICs break for employers who have physical premises in a designated Freeport tax site. Such employers are able to benefit from a reduction in the amount of NICs they pay on the earnings of a new Freeport employee for the first 36 months of their employment in the Freeport.
A Freeport employee is one who spends at least 60 per cent of their time working in a Freeport tax site (unless their working arrangements have been adjusted to take account of disability, pregnancy or maternity). At present, the relief only applies where the employment commences on or after 6 April 2022 and before 6 April 2026.
Where the conditions are met, the employer only has to pay secondary contributions during the first 36 months of the Freeport employee’s employment to the extent their earnings exceed the Freeport upper secondary threshold. This is set at a lower level than the other upper secondary threshold – at £481 per week, £2,083 per month, and £25,000 per year for 2022/23. The Freeport employee does not benefit from reduced contributions, paying primary contributions as usual on their earnings where these exceed the primary threshold.
Freeport employees should be given the category letter F where category letter A would otherwise apply. Category letter I is used for Freeport employees who are married women entitled to pay reduced rate contributions, category letter S is used where the Freeport employee is over state pension age (and so pays no primary contributions) and category letter L is used for Freeport employees who have other employments and are able to defer contributions in the Freeport employment.
Impact of NICs breaks
Where the employee is under 21, an apprentice under 25 or an armed forces veteran in the first year of their first post-forces civilian employment, the NICs break is worth up to £109.30 per employee per week to the employer at current rates (13.8% (£967 - £175)).
Where the employee is a new Freeport employee, the NICs break will save the employer up to £42.23 (13.8% (£481 - £175)) per week.
Practical tip
Check whether you are able to benefit from any of the NICs breaks in respect of your employees and where you are, check that the correct category letter is used to give effect to the relief.
