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HMRC internal manual

Employment Related Securities Manual

PAYE & NICs

Introduction to National Insurance Contributions (NICs)

The imposition of NICs on employment-related securities and options is achieved through two pieces of legislation:

  • The Social Security Contributions and Benefits Act 1992 (SSCBA92), and
  • The Social Security (Contributions) Regulations 2001 (SSCR01).

Their effect is described below. A full chronology of the NICs legislation is set out in ERSM170710.

Earnings

SSCBA92/S3 defines “earnings” as including “any remuneration or profit derived from an employment”. SSCBA92/S6 imposes a Class 1 NICs liability where in any tax week earnings are paid to or for the benefit of an earner. The amount of earnings is calculated or estimated as prescribed by regulations.

In addition, SSCBA92/S4(4)(a) specifically treats as earnings, for the purposes of SSCBA92/S3, the amount of any option gain under ITEPA03/S478, 479 & 480. From 1 September 2004, the amount subject to NIC does not take into account any income tax relief available under:

  • ITEPA03/S481 (relief for secondary Class 1 contributions met by employee), or
  • ITEPA03/S482 (relief for special contribution met by employee).

The straight forward acquisition of securities by an employee from his employer treated as earnings under SSCBA92/S3, provided the securities are readily convertible assets. Securities are defined in the regulations as having the meaning given in ITEPA03/S420. Schedule 2 of the SSCR01 explains how earnings are calculated in certain cases. Paragraph (5)(1)(a) of Schedule 2 says that where payment is by way of the beneficial interest in any asset falling within Part III of Schedule 3, the amount of earnings is the best estimate which can reasonably be made of the amount of general earnings in respect of that asset.

Part II of Schedule 3 of the Regulations provides for certain payments in kind to be disregarded from earnings. However, Part III of Schedule 3 makes it clear that a payment by way of a readily convertible asset, within the meaning of ITEPA03/S702, is not disregarded as a payment in kind.

Before 1 September 2003, a NICs liability on the acquisition of a share option only applied to long options and to share options granted to employees not both resident and ordinarily resident in UK (see ERSM110110).

For other employment-related securities charges in Chapters 2 to 4 of Part 7 ITEPA2003, Regulation 22 of SSCR01 provides that certain amounts are treated as “earnings” for the purposes of SSCBA92/S3. In particular, Regulation 22(7) specifies that:

  • an amount which counts as employment income of the employed earner in relation to employment-related securities (within the meaning given by ITEPA03/S421B (8)); and
  • to which ITEPA03/S698 (PAYE: special charges on employment-related securities) applies – see ERSM170100.

is treated as earnings.

NICs on Chapter 3C charge on notional loan

For the annual charge on a notional loan created by Chapter 3C (see ERSM70130) there is only liability under Chapter 7 Part 3 of ITEPA 2003 (benefits). This creates a potential Class 1A NICs liability by virtue of SSCBA92/S10.

However, regulation 22(7) ensures that a Class 1 NICs liability arises on the discharge of a notional loan under ITEPA03/S446U (see ERSM70140).