State pension age and NI contributions
One of your employees will soon reach state pension age, but they’ve decided to postpone their retirement and continue working. What happens about National Insurance contributions in this situation? Naomi Swan takes a closer look below.
The default retirement age which permitted employers to force employees to retire on their 65th birthday, which was the state pension age at the time, was abolished on 1 October 2011.
As the law now stands, it’s an employee’s personal choice when they retire and they don’t have to retire once they reach state pension age. State pension age is the earliest age at which an individual is entitled to start receiving their state pension.
After the default retirement age was removed, many employees decided to stay on in employment despite reaching state pension age. The state pension age is currently 66 for men and women and it’s scheduled to rise to 67 between 2026 and 2028.
Going back to the original question, what happens about NI contributions (NICs) where an employee continues to work after state pension age?
Employees no longer have to pay Class 1 and Class 2 NICs once they reach state pension age, so you must stop deducting them from their pay, but this won’t happen automatically.
You have to effect this change by updating the employee’s NI category letter to “C” in your payroll software or instruct your payroll provider do this on your behalf.
Proof of age
However, even if you’ve employed the individual for some time, your employee must still show you one of the following documents to prove that they’ve reached state pension age:
• Birth certificate
• A letter from HMRC confirming that they’ve reached state pension age (if they don’t want you to see their birth certificate or passport).
Do make sure you see the original document and keep a copy on the employee’s personnel file.
Unfortunately, employers are not so lucky and you must continue to pay employers’ NI on the earnings of an employee who has reached state pension age. The employers’ NI liability remains whatever the employee’s age.
Where an employee continues to work past state pension age and they qualify for that benefit, they will receive their salary payments from you and their state pension from the government.
If the two together exceed the employee’s annual tax-free allowance, they’ll have a personal income tax liability – but that’s a matter between them and HMRC. In the event the employee overpays NICs, for example because they have not given you proof of their age in time, they can claim the excess back from HMRC.
An employee ceases paying Class 1 and Class 2 NICs on their earnings once they reach state pension age. But this won’t happen automatically and they must provide you with proof of age, e.g. a passport, and you then update their NI category letter to “C” in your payroll software. Employers’ NI remains payable regardless of the employee’s age.