Insights

Currently around 1.2 million people in the UK are in paid employment and also over the state pension age. We are living longer, are healthier for longer and have more financial commitments than ever. So it’s no surprise that people are choosing to work for longer than is necessary simply to be eligible to receive the state pension.

This article explains the rules for employers with older workers and for payroll administrators who need to comply with the latest guidelines.

Do older employees need to pay NICs?

Employees over the state pension age do not need to pay Class 1 national insurance contributions, or NICs, (known as primary contributions), but their employer needs to continue paying Class 1 secondary contributions.

There are some exceptions to this rule, depending on when the employee is paid.  Any payments due before the date when individual reaches state pension age will attract NICs from the employee, but payments made after that date are exempt. If a salary is paid late, the portion that was due before the relevant pensionable date will incur NICs. Whatever the dates involved, employers’ NICs will always be due on all payments to an employee.

Effective payroll administration for older workers – 4 key recommendations

1. It’s up to an employer to amend their payroll records and ensure their employees are registered to no longer pay NICs if they do not need to. Otherwise they will be paying the wrong amount of tax.
2. The date when the transition to NIC-free payments occurs is not necessarily the individual’s birthday; it will vary depending on when they were born and their gender.
3. Payroll administrators can use the gov.uk calculator to establish the correct date as this can be confusing.
4. Always obtain proof of an employee’s age – from their birth certificate or passport – to ensure no mistakes are made which could result in a shortfall and penalties due.

Example: A woman born on 31 August 1955 reaches state pension age on 6^th November 2019 when she is 64 years and 2 months old, but a man with the same birthday reaches pensionable age on 31^st August 2020 when he is exactly 65 years old.

What happens when an employee reaches state pension age?

Be mindful that most employees will not achieve the state pension age in a way that coincides nicely with salary payment runs. This means payroll procedures may need to be adjusted to allow for NIC payments part-way during a pay cycle.

When an employee reaches the state pension age, they will need to be re-classified on the payroll as ‘Category C’.

If the pensionable age date happens before a payment run is processed, the switch to Category C can occur and they will be exempt from NICs thereafter.

If it happens after a payment run and part way through a pay cycle, the switch must occur after the next payroll cycle. NICs will be due for the remainder of that pay period but thereafter, they will become exempt.

Payroll administration procedures to be aware of

Processing employee information for HMRC can be confusing in these situations because although an employee’s payroll status may have been changed to Category C, it is important to continue reporting payroll information using their original category until the tax-year end.

Once an employee starts claiming the state pension, they will be issued with a new tax code which reflects the fact that their state pension is not taxed at source. The amount of the employee’s take-home pay may therefore reduce and be lower than the employee anticipates.

It may be necessary to explain to an employee the way in which their income is taxed and the fact that they no longer have to pay NICs, although their employer does still incur this liability.

RJP LLP offers a full payroll outsourcing service to save business owners the bother of undertaking this administration. To learn more contact partners@rjp.co.uk