HMRC internal manual

Employment Related Securities Manual

ERSM170760 - PAYE & NICs

NICs elections: guidance notes for using the models

Section 1 – between (the signatories to the joint election)

Section 2 – purpose and scope of election

Section 3 – Arrangements for payment of secondary NICs

Section 4 – Duration of this election

Section 5 – Declaration

Two-part Joint Election

Section 1 – between (the signatories to the joint election)

Employer (Secondary Contributor)

An election must be made jointly between the secondary contributor, (usually the employer) and their employee. It is important to show this at the beginning of the joint election. Give enough information to identify which parties are entering into the election.

There may be occasions when the company granting the option(s) / awarding the restricted or convertible securities may not necessarily be the secondary contributor - for example, it may be the parent company. In these cases HMRC will accept joint elections from the parent company but only if it has been authorised to act on behalf of the secondary contributor and this is clearly stated in the election. We will still require details of the secondary contributor (the employer) to be shown in the joint election.


Company XYZ Ltd, whose Registered Office is at [insert address and Company Registration number], is authorised by ABC Ltd, the Secondary Contributor, whose Registered Office is at [insert address and Company Registration number] to enter into a Joint NICs Election with employees of ABC Ltd on behalf of ABC Ltd.

Group Companies

There may be occasions when a joint election will be submitted on behalf of a group of companies where there is more than one secondary contributor. In these cases, rather than provide us with a separate election for each participating secondary contributor, you may submit just one election format to be used by all companies in the group. But you must provide full details of all the secondary contributors who will be using the election, for example as an annex to the joint election.

If in the future more companies join the group and these are also likely to want to use the approved joint election, then details of the new companies must be provided to HMRC as soon as possible so that we can extend the Approval Notice to include them. Without this approval extension, additional companies cannot use the election.

Employee – ‘the earner’

As the joint election must be between the employer (secondary contributor) and the employee (earner), the identity of the employee(s) being asked to bear the employer’s NICs liabilities must be shown. The model joint election asks for the employee’s National Insurance number. This is not strictly necessary but does help to ensure that where there are several employees with the same name, the unique National Insurance number issued to them will help to identify who they are.

You can, if you wish, include the employee’s home address or employee staff numbers if this will help to make identification of the employee easier.

Where a substantial number of employees are involved we would suggest that you consider using the two-part election format. Each employee still needs to complete their part of the election, but the employer only needs to complete their part of the election once to make it applicable to all participating employees.

Section 2 – purpose and scope of election

Part (a)

NICs Elections can now be made to transfer any employer’s secondary NICs liability that arises on employment income from securities options, as well as awards of restricted or convertible securities. However, elections that are made for awards of restricted or convertible securities can only be applied to NICs liabilities due on amounts treated as employment income arising from events occurring after the award of the securities, commonly referred to as post-acquisition chargeable events.

Details of the employment related securities options / restricted securities / convertible securities that have been awarded, or are going to be awarded, to the employee at a future date must be included in the joint election.

It is recognised that not all options or awards are granted through a specific scheme or plan and that an employer can make individual arrangements to grant options, award restricted securities or convertible securities. A Joint Election can also be entered into for these individual events.

As part of the details, we require that the schemes, plans or individual awards under which employment related security options are granted, or restricted and convertible securities are awarded, must be identified in the joint election.

The details can either relate to a specific option grant/restricted or convertible securities award, or cover a period in which the securities option/ restricted or convertible securities will be awarded.

It is for this reason that the model joint election provides 3 alternatives and you have the option of choosing the most appropriate one or a combination of them:

  1. On [DD/MM/YYYY]

This relates to a specific grant/award of securities options/ restricted or convertible securities. An election that shows this date will only allow the transfer of employer’s NICs for gains arising from those specific grants/ awards made that day (providing a gain has not already occurred before the making of a joint election). This will mean that another joint election will need to be entered into between employer and employee if the employer wants the further grant/ award of securities options/ restricted or convertible securities to be covered by a joint election.

  1. Between [DD/MM/YYYY] and [DD/MM/YYYY]

This allows the election to apply to securities options/ restricted or convertible securities granted/ awarded between (or on) the dates specified in the election (providing a gain has not already occurred) to an employee, or to be granted/awarded before an end date specified in the election. The last date could be the date that the share plan ceases or any other date.

  1. After [DD/MM/YYYY]

This allows you to set a date after which future new employees will be asked to enter into the joint election from the date their employment commences or after they have passed a period of probation.

Most companies choose the second option as it provides more flexibility to make further grants or awards without the need to seek HMRC approval of, and enter into, another joint election with the employee.

Of course this should not prevent option 1 being considered if the employer feels that it provides more control and certainty as to which specific options or security awards are covered by a joint election. Please note that option 1 can also include grants or awards already made, as long as the NICs liability has not arisen before the joint election is entered into.

An important point to note is that while a joint election can be used to cover future grants and awards, the legislation will only allow the transfer of employer’s NICs for those grants and awards that have actually been made during the period for which the election’s approval remains valid.

For example, a joint election uses option 2 to cover securities options granted between 6April 2004 and 5 April 2014. Options are granted on 6 April 2005, 6 April 2006 and 6 April2007. But on 10 May 2007 HMRC withdraws approval for the Joint Election, which means that any options granted from the 10 May 2007 onwards are no longer covered by the joint election.

The important point is that, despite the withdrawal of approval part way through the election’s stated period of cover, the election remains effective for NICs liabilities arising on those options granted before approval was withdrawn. So, in this example, the options already granted in 2005, 2006 and 2007 still remain covered by the election and employer’s NICs can still be transferred as and when the option gains occur. But the election will not allow the transfer of secondary NICs liabilities arising on any options granted after the date on which approval is withdrawn, regardless of the period of cover stated in the election.

Part (b)

This refers to the National Insurance legislation under which an election can be made, which is sub-paragraph 3B(1) of Schedule 1 to the Social Security (Contributions and Benefits) Act 1992.

Part (c)

This is a statement that the purpose of the election is to transfer the employer’s NICs liability to the employee, under the limited circumstances identified in the joint election.

Part (d)

The regulations require that you identify the extent of the transferred employer’s NICs liability. We have provided three alternatives that you may wish to choose from:

  • the whole of the secondary liability – this is the liability that would be payable by the employer based on the employer’s NICs rate in force at the time of the securities option gain occurring or, in the case of a restricted or convertible security, the increased value to the employee when one or more restrictions are lifted or the security is converted to another security of greater value.
  • [X %] of the liability – you may decide that the liability for employers NICs is to be split between employer and employee on a percentage basis.
  • The liability on gains in excess of [£X] – this is similar to the previous choice but instead it is based on a monetary value.

Example – securities option/ restricted or convertible securities

The employer may decide that they are prepared to meet any employer NICs liability on, say, the first £0.50 gain per share following the exercise of a securities option, lifting of a restriction or the conversion of the security. Any employer NICs liability on the gain in excess of that amount will then be transferred to the employee under the joint election. Also acceptable would be the situation where the employer pays the employer NICs due on, say, the first £500 of the gain, but the election will cover any excess over that amount, which would therefore be transferred to the employee.

Securities option gains will not only result from the exercise of an option but also from the assignment, release or cash cancellation of an option. If the employer decides that it is not appropriate for the election to cover gains made on these other occasions, the force of the election can be limited to gains made by way of exercise only.

This means that the employer will remain liable for employer’s NICs due on any gains from the assignment, release and cash cancellation of the options as they fall outside the scope of the election.

Similarly if an employer chooses to limit the Joint Election to apply to the lifting of specific restrictions or specific conversions, the transfer of employer’s NICs will be limited to NICs liabilities arising when those events take place.

Section 3 – Arrangements for payment of secondary NICs

Before formal approval can be given HMRC needs to be satisfied that suitable arrangements are in place for the transferred NICs to be paid to HMRC on time. It is important that any application for NICs election approval includes supporting material that clearly demonstrates that appropriate arrangements have been, or in sufficient time will be, put in place to ensure recovery of the transferred employer’s NICs from the employee within the required time scale.

The arrangements listed in this part of the Joint Election are common examples of the different ways that an employer may agree with the employee to recover or receive the transferred employer’s NICs.

Other arrangements may be acceptable. However, whatever arrangements are put in place, an employer will need to ensure that those arrangements are (and remain) robust enough for the secondary NICs to be delivered to the employer to pay to HMRC on time.

Grounds for refusal or withdrawal of Approval

Where an application is made to seek HMRC approval for a Joint Election and an employer is unable to demonstrate or provide suitable details to ensure that the employer’s contributions will be received from the employee, this is sufficient reason for HMRC to refuse approval of the joint election facility. The secondary contributor has a right of appeal in these circumstances if they can show that adequate arrangements are in place to ensure the contributions will be received from the employee.

In the event that the Joint Election has been approved by HMRC, and it is then found that there has been a failure in the arrangements, or the arrangements have changed such that it may lead to the failure to receive the payment of the employer’s contributions from the employee, this is considered sufficient reason to withdraw approval so that no further use may be made of that joint election. Once again the secondary contributor has aright of appeal if they can show that the decision by HMRC to withdraw the joint election approval was made incorrectly.

Section 4 – Duration of this election

Part (a)

It is important to make clear to the employee what the life span of the joint election will be and the events that will bring the joint election to an end.

Therefore, the Joint Election must contain all four legislative circumstances, as contained in the model joint election, these are:

  • It ceases to have effect in accordance with its terms.
  • It is revoked jointly by both parties to the election.
  • Notice is given to the earner by the secondary contributor terminating the effect of the election.
  • HMRC withdraws their approval.

In the situation where the election relates to a specific grant or award, the election will come to a natural end when:

  • for a securities option, a gain occurs;
  • for a restricted security, the last restriction is lifted; and
  • for a convertible security, the conversion takes place.

Part (b)

Paragraph 1(1)(e) of Schedule 5 of the Social Security (Contributions) Regulations 2001, does require a statement of the method that the employer will have in place to ensure that transferred employers NICs are received by them.

While section 3 details the arrangements as to how the employer’s NICs will be received it is also important to be aware of what arrangements are in place for ex-employees, or those employees who are sent abroad to work and who are no longer on the secondary contributor’s payroll.

This paragraph is not compulsory, but it does however indicate to HMRC that the secondary contributor will be aware when an individual, who is no longer an employee of the secondary contributor or has been seconded abroad, will continue to be subject to the arrangements for payment of the transferred employer NICs.

If you decide to leave this out of the joint election, then you must be prepared for HMRC to make enquiries as to how the company will ensure that when ex-employees or overseas workers exercise their options, or restrictions are lifted, or conversions take place, that the company will know when these events occur, what steps will be taken to recover the secondary NICs from the employee and that this will then be paid over to HMRC on time.

Failure to explain this will lead to approval being withheld until suitable evidence is provided. This is necessary since HMRC must be satisfied that with the transfer of the employer’s contributions to the employee, there will not be a failure in receiving the employer’s contributions from the employee regardless of any change in their employment.

Part (c)

The joint election will not to apply where the income from the securities is relevant employment income that arises by virtue of the rules in Chapter 3A, Part 7 ITEPA 2003. Chapter 3A specifically deals with certain types of avoidance transactions that seek to reduce the income tax &/or National Insurance liabilities on earnings from securities awarded to an employee.

By this we mean that no transfer of employers’ NICs is allowed to take place between the employer and the employee and therefore, the employer continues to be legally responsible for its payment.

Section 5 - Declaration

Must be signed and dated by both the employer (secondary contributor), and the employee (‘earner’).

Two-part Joint Election

A two-part model joint election format is available to help companies that want toenter into elections with a large number of employees.

The two-part model is the same as the single election format, except it requires Part A to be completed by the employee (‘earner’) and Part B by the employer (secondary contributor). Also, each part indicates that the other party has signed the other part of the joint-election.