Employing people over the state pension age: National Insurance Contributions
As a result of the Government removing the Default Retirement Age back in 2011, there are currently over 1 million people working beyond their state pension age in the UK.
As you would expect, this has implications for employers, in as much as careful consideration needs to be given to an employee’s National Insurance Contributions (NICs) at, and beyond, state pension age.
For the employee, this means that Class 1 primary NICs will cease. For employers however, Class 1 secondary contributions must continue to be paid in the normal way in respect of employees over the state pension age.
NIC Exemption after state pension age
This NIC exemption for employees operates by reference to the date on which an employee is paid. Any earnings that are due to be and are paid after the individual reaches state pension age are not subject to NICs. However, the following remain subject to employee 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 (e.g. salary which is paid late).
What should employers do once an employee reaches state pension age?
Employers need to update their payroll records to ensure that they stop paying NICs. This is done by changing the employee’s National Insurance category letter to ‘C’ in their payroll system.
How does an employer calculate an employee’s state pension age?
Whereas in the past, an individual reached their state pension age on their birthday, this is no longer the case, and instead is determined by when they were born and their gender.
Therefore, care should be taken before making any changes; obtain proof from your employee that they have reached state pension page (birth certificate, passport or a certificate of age exception (CA4140) if they have one), and then use the GOV.UK calculator to check the employee’s state pension age (www.gov.uk/check-state-pension).
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.
What happens if an employee reaches state pension age midway through a pay period?
Whilst possible, it’s highly unlikely that an employee will reach state pension age on their payday!
It’s important to remember that when you change an NI category it will apply for the whole of that pay period. You therefore must 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) will not pay any NICs for the whole period.
If the employee will not 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.
What happens from an employee’s perspective?
Employees who start to claim the state retirement pension (rather than deferring it) whilst still in employment are likely to be issued with a new tax code. The reason for this is that while the state pension is taxable, tax is not deducted from it at source. The employee’s tax code is therefore adjusted to reflect the amount of state pension that they receive. This could result in a drop in take-home pay for the employee, despite no longer having to pay NICs.
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.
If you require any clarification around this article please contact Ken or Jo.