The National Insurance (NI) category letter is used to work out what contributions the employer and employee need to make when running payroll.
Main National Insurance Categories
Most employees fall into category A.
All employees apart from those in groups B, C, H, J, M, V and Z in this table
Married women and widows entitled to pay reduced National Insurance
Employees over the State Pension age
Apprentices under 25
Employees who can defer National Insurance because they’re already paying it in another job
Employees under 21
Employees who are working in their first job since leaving the armed forces (veterans)
Employees under 21 who can defer National Insurance because they’re already paying it in another job
Category Letters for employees that work in freeports
If the company is based in a freeport and this has been set within the tax settings of the company, there will be the following categories available for new employees.
All employees who work in freeports, apart from those in groups I, L, and S in this table
Married women and widows who work in freeports and are entitled to pay reduced National Insurance
Employees who work in freeports and can defer National Insurance because they’re already paying it in another job
Employees who work in freeports and are over the State Pension age
Category letter X
This is only for employees that do not have to pay national insurance, for example they are under 16. If you are getting X as the only NI category option, you need to check you have entered the employee's correct date of birth.
Apprentices - Category H
If you have an employee that is an apprentice following an approved UK government statutory apprenticeship framework (frameworks can differ depending on the UK country) and is under 25 - you should select Category H, even if this employee is also under 21. Further HMRC guidance is linked below.
Once they turn 25, Shape will move them to category A for you.
Under 21 - Category M
If your employee is under 21, they should be category M, unless they are an apprentice. When they turn 21, they need to be moved to Category A for the next pay period. Shape automatically does this and a flag will show on the pay run screen that the employee has been moved to Category A.
Veterans - Category V
When adding an employee that is a veteran, you need to select under the Empolyee Info that the employee is a vetran and the start date of their first
Defer National Insurance - Category J and Z
Some employees already pay national insurance in another job, and might be entitled to pay a lower amount in a second job. However, they need to apply to HMRC for this and give proof to their employer before the national insurance category J or Z can be applied.
They can do this if any of the following apply:
they pay Class 1 National Insurance with more than one employer
they earn £967 or more per week from one job over the tax year
they earn £1,209 or more per week from 2 jobs over the tax year
They’ll usually pay a reduced rate of 2% on weekly earnings between £242 and £967 in one of the jobs (instead of the standard rate of 12%).
Employers should not be applying this unless the employee can supply evidence from HMRC they are entitled to defer. See HMRC Further Guidance.