Employers should pay no National Insurance on any worker under 25, MPs have told the government, after hearing “overwhelming evidence” that the current regime is pricing young people out of the jobs market.
The Work and Pensions Committee said higher employer National Insurance rates are putting businesses off hiring, with the damage concentrated in the sectors that have always been the first rung of the career ladder: retail and hospitality.
More than one million 16 to 24-year-olds are now not in education, employment or training. The committee called the figure a “travesty”.
For SME owners, the more immediate point is the arithmetic. Employers pay nothing for staff under 21, and nothing for apprentices under 25, until earnings pass £50,270. But take on a 21 to 24-year-old who is not an apprentice and the bill starts at £5,000, at 15 per cent on everything above it.
The result is a cliff edge that lands precisely where most young people are ready to start a proper job. A firm weighing up two similar candidates, one 20 and one 22, faces a materially different payroll cost for the same work. MPs say that gap undermines the government’s own efforts to get this age group into employment.
The committee also cited former minister Alan Milburn’s review of youth unemployment, which found the government spends 25 times more on benefits for young people than on supporting them into work.
The backdrop will be familiar to anyone running a payroll. Firms have been cutting jobs at the fastest pace in four years since the £25bn rise in employer contributions, with more than half of the losses falling in hospitality and retail. Those are the same two sectors the committee identifies as the traditional entry point for younger workers.
Ministers have not been idle. Employers can now claim £3,000 for hiring a jobless 18 to 24-year-old who has been claiming benefits for six months or more, and foundation apprenticeships are being extended into hospitality and retail from April. The committee welcomed the early steps but said further action is essential to prevent long-term harm.
The distinction matters for smaller firms. A grant is a one-off payment against a permanent cost. An NI exemption is structural, it applies automatically through payroll, requires no application, and does not run out. For a business with tight margins and no HR function, that difference is not academic.
There is also a question of what sort of jobs young people are landing when they do get hired. Sheila Flavell CBE, chief operating officer of FDM Group, argues the debate has settled on the wrong metric.
“Recent conversations around graduate employment focus on whether people have jobs but not actually on whether they have the right jobs,” she said. “Underemployment is a growing threat for the UK labour market. We have capable, ambitious graduates working in roles well below their skill level, and that is a waste of talent on a national scale.”
“What’s missing is a practical bridge between education and industry. ‘Earn while you learn’ models and structured, industry-led training give graduates the chance to build real-world experience and move into long-term careers matched to their skills.”
That points to a second opportunity for SMEs. Larger employers dominate formal graduate schemes, but structured on-the-job training is something smaller firms can often do better, and more quickly, than corporates with rigid intake processes. The NEET figure now sitting close to one million represents a very large pool of people nobody is currently competing for.
Whether the Treasury accepts the recommendation is another matter. Extending the under-21 exemption to everyone under 25 carries a cost, and the fiscal position is tight. But the committee’s argument is that the alternative is more expensive still, paid out in benefits rather than wages.
