National Insurance cuts and youth employment: Why businesses should recruit youngsters

Hasib Howlader | 7th March 2014

The reduction in employers’ National Insurance Contributions (NICs) due to come into force next month means there may never be a cheaper time to bring fresh blood into your business – particularly the blood of young’uns.

So, with a reduction in NICs for under 21s and youth unemployment at approximately 20% – much higher than it is for many of our continental cousins – maybe it’s time to think about expanding and hiring somebody new.

We know the prospect might seem daunting – where on earth do you start? – but this might just be a great opportunity for your business so listen up.

Firstly, let’s talk about why it might save you some hard-earned cash….

Why is it cheaper to bring someone new on board? What changed?

The Chancellor gave the economy the once over during last year’s Budget and Autumn Statement and announced that employers’ National Insurance contributions are being cut for employees between the ages of 16 and 21.

The move, aimed at boosting youth employment, means that from April 2015 you won’t have to pay NICs for workers under 21. Happy days.

This means the cost, for example, of employing a person under the age of 21 on a salary of £12,000 will be reduced by £500.

This follows an earlier announcement that from April this year employers will receive an employment allowance which cuts £2,000 off the NICs bill.

What’s more, the minimum wage is lower for workers who are younger than 21 or on approved apprenticeship schemes – so there’s plenty of good news for employers there too (not quite so much for the employees themselves granted).

Here’s the breakdown for you:-

See here for some regulations you’ll need to know if you are thinking of employing someone under 18s.

There’s a lot to take on board but do not fear. We’ve put together a step-by-step guide which will hopefully show that taking on somebody new is not as hard as it might first seem, so let’s start from the beginning….

Employing new members of staff: Seven simple steps to success

Step 1 Set up a Pay As You Earn (PAYE) scheme. No matter how much you are paying an employee, you have to submit monthly returns and declare how much you’re paying to HMRC.

How? Don’t worry, it’s simple: You can request that one be set up from HMRC or you can ask your accountant to do it for you.

Step 2 Ask for the employee’s P45 or P46. If they are making a move to your business from a previous job held in that year, they will have been issued a P45 showing their pay and tax to that date.

If not, you need your new recruit to fill out a P46 form and submit it to HMRC so they can set up the right tax code for them.

Step 3 Decide how frequently you will be paying them. This will depend on how your business works. If they are on a fixed annual salary, monthly payments make sense. If you have a more flexible arrangement and their hours vary then a weekly payroll might work better.

Always remember to consider the impact this arrangement will have on your cash flow – we wouldn’t want you to run into any difficulties.

Step 4 Think about how much you are going to pay them, bearing in mind that for over-21s the minimum wage is £6.31 per hour gross.

From that wage, once the payroll is processed the employee’s tax and National Insurance will be deducted.

You will also have to pay employer National Insurance contributions – or Class 1 Secondary, to give it its official name. This will be an extra cost to you on top of their salary.

Step 5 Process the payroll. We’d always advise getting into the habit of processing the payroll on the same day each week or each month. This makes sure the employee gets paid and it makes your accountant’s job a lot easier, so everyone’s a winner!

Step 6 Remember your deadlines: The payroll for a specific month needs to be processed before the 5^th of the following month.

So for April you will need to let your accountant know the figures by March 5. You also collect the tax and NI of your employees for HMRC, which is paid to them.

If the total payment for the month is less than £1000 it can be paid quarterly. If it is more it will need to be paid monthly. The deadline for payment is the 19^th of the month following the payment period (so for quarter 3, or Oct-Dec, the deadline would be January 19).

Step 7 Submit the P35. At the end of the year you need to finalise the total payments you’ve made to your team with the P35 submission and provide all your employees with P60s.

And that is it, happy days. Of course there are other complications – there always are with HMRC! These include statutory holiday payments, sick pay, maternity and paternity pay but that we’ll cover that in a follow up – one step at a time!

Before you make any decisions which will affect your business, we recommend that you discuss it with your accountant or a business advisor.

We’re always happy to help and offer advice so feel free to call us to discuss your circumstances if you think it will help give you a better idea whether employing somebody new is right for you.