Every employee on a UK payroll carries a National Insurance category letter, and it decides how much the employer pays. Put someone in the wrong category and the error repeats every pay period until somebody reconciles it — usually the payroll auditor, usually several years later, and usually in the direction of an underpayment plus interest.
What the letter does
The category letter tells the payroll which set of rates and thresholds to apply. There are sixteen in use — A, B, C, D, E, F, H, I, J, K, L, M, N, S, V and Z — and they exist because the system gives relief for particular populations by zero-rating the employer's contribution up to a defined threshold rather than by paying a grant. There is also category X, used where no National Insurance is payable at all — employees under 16, and earnings below the point at which anything is due. One thing a letter never does is establish entitlement: it tells the payroll which treatment to apply, and the conditions for the underlying relief have to be met and evidenced separately.
For 2026/27 the baseline is straightforward. Employees pay nothing up to the primary threshold, 8% on earnings between £242.01 and £967 a week, and 2% above that. Employers pay 15% above the secondary threshold, with no upper limit — and 15% on benefits through Class 1A and 1B as well.
The categories that actually save money
Most employees sit in category A — the standard rate for those who do not fall into a more specific group. The letters that reduce the employer's bill are the ones worth knowing:
- M — employees under 21. The employer pays nothing up to the upper secondary threshold, which is aligned with the upper earnings limit. On a £30,000 salary this is a saving of several thousand pounds a year;
- H — apprentices under 25 on an approved apprenticeship. Same relief, same threshold, and it applies throughout the apprenticeship;
- V — qualifying veterans in the first twelve months of their first civilian employment since leaving the armed forces. The relief is generous and consistently underused, because employers do not ask;
- F, I, L and S — the freeport letters, for eligible employees at a freeport tax site;
- N, E, D and K — the investment zone letters, which are a separate relief with its own conditions and its own sites. The two sets are not interchangeable, and picking a freeport letter for an investment zone employee is a real and recurring payroll error;
- C — employees over state pension age, who pay no employee National Insurance at all, though the employer still pays its 15%;
- J and Z — deferment cases, where the employee has multiple jobs and has been granted deferment so that only the 2% rate applies in this employment;
- B — married women and widows holding a valid reduced rate election, a shrinking population but one that still exists.
Three errors recur. Failing to move an employee out of M when they turn 21 or out of H at 25 or at the end of the apprenticeship, which underpays employer National Insurance. Failing to move someone into C at state pension age, which overpays employee contributions — the employee's money, and their complaint when they find out. And never applying V at all, because nobody asks new starters whether they have recently left the forces.
Getting it right at the point of hiring
The category is set from the starter information and needs re-testing whenever a fact changes. The practical controls are simple and rarely present:
Ask the right questions on starting — date of birth, state pension age status, apprenticeship status, veteran status, and whether the employee has other employments. Diarise the birthdays that change a category, and have the payroll software flag them rather than relying on someone noticing. And reconcile annually: run a report of employees by category against their dates of birth and start dates, and investigate anything that does not match.
That last check takes an hour and is the single most effective payroll control there is, because category errors are systematic rather than one-off. An employee in the wrong letter is wrong in every one of the twelve payslips that year.
Where it sits alongside the other employer reliefs
Category letters are only one of three mechanisms reducing employer National Insurance, and they interact. The Employment Allowance comes off the total employer bill once the zero-rated categories have done their work. Pension salary sacrifice reduces the earnings on which contributions are calculated in the first place. And the apprenticeship levy runs in the opposite direction, charged on a pay bill that includes the earnings of under-21s and apprentices under 25 even though no employer contributions arise on them.
A payroll optimised across all four is meaningfully cheaper than one running on defaults — and the gap is almost always found in the category letters, because they are set once and never looked at again.
Acumon reviews category allocation and the wider employer position through payroll audit work, and runs payroll properly from the outset through payroll management and outsourced payroll. If nobody has reconciled categories against dates of birth this year, start there.