What You Need To Know About Under 21s National Insurance

Are you aware that the National Insurance rules for individuals under 21 are a bit different compared to those for most employees? In this article, we aim to provide you with some context on the topic of National Insurance as a whole. 

We’ll delve deeper into the specifics of National Insurance for those under 21, highlighting the upper secondary threshold and how it influences the National Insurance category for younger workers. This will help you grasp the reasons behind the distinct treatment of this age group in the National Insurance system.

National Insurance contributions are the money paid to Her Majesty’s Revenue and Customs (HMRC) by employees, employers and the self-employed. While most employees won’t feel particularly delighted to see all of the deductions listed on their payslips each week or month, the origins of national insurance actually stemmed from efforts to protect people from hardship; today’s national insurance contributions (NICs) are used to fund things like the state pension and allowances such as jobseeker’s allowance, maternity allowance and bereavement support payment.

The National Insurance Act 1911 underpins today’s system; in 1975 NICs started to be calculated according to the level of earnings an individual received and they were collected via the Pay As You Earn (PAYE) system, along with the employee’s income tax. These days, all contributions are submitted electronically to HMRC via the employer’s real time submissions with the payment then made later.

Different categories of people pay different classes of national insurance contributions. National Insurance category classes are determined by the employment status of an individual, their earning levels and their continuous NI record. Class 1 national insurance is made up of two different elements. The first is the employee’s contribution, which is taken from their pay and the second is the employer National Insurance contributions – which as the name suggests is made directly by the employer. Both are paid only once an employee’s earnings reach a particular threshold. The primary threshold is the threshold at which employees start paying contributions. The secondary threshold is the threshold at which employers start paying NI contributions.

Self-employed individuals pay two classes of national insurance: class 2 which is a flat weekly rate plus class 4 which is calculated as a percentage of their profits. Class 1 and class 2 National Insurance contributions entitle individuals to receive certain state benefits, notably the state pension – although people who haven’t made sufficient contributions will not be entitled to get the full pension.

To find out an employee’s National Insurance category, you can find a National Insurance category letter at the top of their payslip. This letter will indicate the type of NI rates that apply to them.

Going back a few years there was a change in the law. From the 6th April 2015 employers no longer had to pay class 1 secondary national insurance under 21 contributions on earnings up to the upper secondary threshold (UST) for any employees under 21 years old. The change in the law means that employers do not pay any secondary contributions for under 21s with earnings between the secondary threshold, currently set at a monthly figure of £737, and the UST which is currently set at a monthly figure of £4,189. Beyond the upper secondary threshold, Class 1 secondary NICs will apply. More details on the latest thresholds can be found here.

The zero rate doesn’t apply to Class 1A (employer-only contributions payable on most benefits in kind) or Class 1B (employer-only contributions payable on items included within a PAYE settlement agreement) NICs.

The payroll system you are using should be set up to automatically deduct the right amount of national insurance under 21 from the employee and this will be based on their tax code for under 21 and category letter. Most employees will be category A but the majority of under 21s fall into category M (you will find more details on categories here). This information should also be shown on the employee’s payslip. It is essential to know the tax code for under 21 employees, as this affects their national insurance under 21 contributions. If you bring someone into your company who is between the ages of 16 and 20, double check that the correct national insurance category is being applied to ensure you are continually complying with all of your legal requirements.

The change in the law in 2015 created an important benefit for employers; employees aged between 16 and 20 do still need to pay their National Insurance contributions. But even though it’s the employers who have enjoyed the direct financial impact from the abolition of this particular taxation, it was always intended that there would be indirect benefits to the employees themselves thanks to the fact that it was expected to encourage more businesses to recruit and give opportunities to under 21 year olds.

This is something that’s become particularly relevant now as a consequence of the pandemic. Figures suggest that it is younger workers who have been particularly badly affected by it – ONS figures from March last year revealed that almost two thirds of people who had lost their jobs during the pandemic in the UK were under 25. As well as having the direct hit of job losses, under 21s have suffered due to the impact of the pandemic on access to opportunities after leaving education and looking to start out in their career.

And there is also the disadvantage of having missed out on the work experience they might otherwise have expected to receive. As life hopefully returns to normal, the specific rules around under 21s national insurance will at least give employers a financial incentive to consider taking on more inexperienced employees and help to make investing in their development potentially more attractive.

While we have given a very basic overview of national insurance and specifically under-21s national insurance rates in this article, it is a vast and often confusing area. In fact, the management of payroll as a whole is a complex and time-consuming activity. So why not consider outsourcing your payroll to us? As payroll experts, CPS has been supporting clients for over 20 years with all aspects of their payroll management. If you would like to learn more and arrange to see a demonstration of our payroll software, then please do contact us.

Employer National Insurance contributions for their employees are required to start once they reach the age of 16. However, the rate at which these contributions are made can vary depending on the employee’s earnings and their age.

Specifically, the concept of the upper secondary threshold comes into play for younger workers. For employees under the age of 21, employers can benefit from reduced employer National Insurance contributions up to this threshold. 

This means that for earnings up to the upper secondary threshold, employers may pay a lower rate of National Insurance rates for these younger employees, incentivising the employment of younger individuals within the workforce.

To qualify for the full new State Pension, you typically need to have 35 full years of National Insurance contributions or credits. If you have fewer than 35 years but at least 10 years, you’ll still be eligible for a portion of the pension, but it will be less than the full amount. 

The amount of pension you receive increases with each year of National Insurance contributions, up to the maximum 35 years.

It’s important for individuals to check their National Insurance record to see how many years of contributions they have and to understand any gaps that might exist in their record, as there are ways to fill these gaps and potentially increase the amount of State Pension you can receive.

Payroll software simplifies compliance with National Insurance rules for employees under 21 by using the employee’s date of birth to assign the appropriate NI category, usually ‘M’. This ensures the correct reduced employer NIC rates are applied up to the UST. The software calculates contributions accurately, ensuring compliance with HMRC requirements without manual intervention.

To confirm eligibility for under-21 National Insurance benefits, you need to verify the employee’s date of birth. If they are under the age of 21, they qualify for reduced employer National Insurance contributions up to the Upper Secondary Threshold (UST). No additional documentation is typically required beyond confirming their date of birth.

Individuals under 18 are not required to pay National Insurance contributions unless their earnings exceed the lower earnings limit. However, employers are still responsible for ensuring the correct deductions and contributions are applied once the employee turns 16.

For a national insurance 16-year-old, contributions typically begin only if the individual’s earnings surpass the threshold. This means many 16-year-olds may not need to contribute immediately, but their employment details should still be recorded accurately for future deductions.

Employers should also note that while national insurance 16-year-old contributions may not apply in every instance, ensuring payroll systems are set up to monitor earnings and apply deductions correctly is crucial to remaining compliant with HMRC guidelines.