Abolition of NI for under 21’s

From: Lisa Kennery

Abolition of NI for under 21’s

HMRC have published a developer brief and some calculation examples regarding the abolition of National Insurance contributions for under 21s, which takes effect from 6th April 2015.

Abolition of employers National Insurance contributions for the under 21s

20130926 HMRC logo PF-hmrc-logo_1379417f

Who is likely to be affected?

Employers with employees under the age of 21.

General description of the measure

From 6 April 2015 every employer with employees under the age of 21 will no longer be required to pay Class 1 secondary National Insurance contributions (NICs) on earnings up to the upper earning limit (UEL), for those employees.

Policy objective

The removal of the requirement for employers to pay Class 1 secondary NICs aims to encourage them to employ individuals under the age of 21.

Background to the measure

The abolition of employer Class 1 secondary NICs for employees under the age of 21 earning up to the UEL complements other government policies that seek to encourage youth employment and boost economic development.

Operative date

This measure will take effect from 6 April 2015.

Current law

Section 6(1) of the Social Security Contributions and Benefits Act and the Northern Ireland equivalent 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 which is currently £153 per week.

Proposed revisions

Under proposals and subject to earnings up to the UEL, employers who employ or engage employees under the age of 21 at or after 6 April 2015 will not be required to pay employer NICs on the earnings they pay to those employees. The UEL in 2015-16 is expected to be £813 per week (annual equivalent £42,285).

Summary of impacts

This table represents the Government’s current understanding of the impact of this measure.

Exchequer impact (£m) 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19
nil nil -465 -495 -520 -530
These figures are set out in Table 2.1 of the Autumn Statement and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside the Autumn Statement.
Economic impact The measure will abolish employer NICs for employees under the age of 21 earning up to NICs UEL in any pay period.  Reducing the fiscal burden of employer NICs will support youth employment.  The overall economic impact of this measure will depend on aggregate labour demand and the performance of the wider economy.
Impact on individuals and households The employer NICs liability for nearly 1.5 million employees aged between 16 and 20 will be eliminated.  While there are no direct impacts on individuals and households, one of the goals of the measure is to support youth employment and thereby benefit individuals and households, especially those in lower income groups and areas particularly affected by youth unemployment.
Equalities impacts The policy discriminates in favour of those aged under 21 in order to improve their prospects on the employment market. There is a strong policy rationale for focusing help on reducing youth unemployment, and this measure aims to help those at the youngest end of the employment scale where unemployment levels are at their most acute. Accordingly, the scope of the measure represents a proportionate response to the issue of youth unemployment.
Impact on business including civil society organisations There will be some additional burdens on employers to update their systems so the correct NIC letter is applied to employees who are under 21. The measure is expected to directly affect around 340,000 employers. In the majority of cases payroll software will be able to implement the exemption automatically. The ongoing administration costs relate to employers who may need to update their systems manually. The ongoing cost is estimated to average just under £5 per eligible employee (totalling £700,000 across affected businesses).Anticipated one-off costs relate to training and familiarisation, given this a relatively straightforward change it is assumed to require around 30 minutes of preparation per employer already employing under 21 year olds and a smaller time period for all other employers. In total, HMRC anticipates one-off costs across employers of around £7.5 million.

Cost Time Period
Compliance Cost
One-Off Costs £7.5m N/A
Average Annual Costs £0.7m 5
Total Costs (PV) £11m N/A
Compliance Benefits N/A N/A
One-off Benefit N/A N/A
Average Annual Benefit N/A N/A
Total Benefit (PV) N/A N/A
Net Compliance Benefit (NPV) -£11m 5
Impact on Administrative Burden (included in Net Compliance Benefit)
Increase Decrease Net Impact
£0.7m £0 £0.7m

Monitoring and evaluation

This policy will be kept under review through communication with affected taxpayer groups.

HMRC explain that the brief and examples have been issued:

“to provide an overview of how the calculations will work and describe how to deal with certain situations in the payroll. Therefore to aid clarity the calculation method does not show all the ste

ps used in the NI Guidance for Software Developers specification. An updated version of the NI Guidance for Software Developers specification with detailed calculation examples and test data is planned for September 2014.”