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National Insurance Manual

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Tax law rewrite: implications for National Insurance contributions

Background

The second Tax Law Rewrite (TLR) Act - The Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003) replaced the charge to tax under Schedule E with a new charge to tax on employment income, pension income and social security income. The Income Tax (Employment) Regulations1993 have also been replaced by the Income Tax (Pay As You Earn) Regulations (PAYE Regulations) 2003.

Although both re-writes preserve the technical effect of previous tax law, three techniques were used to deliver the TLR intention of providing easier to understand tax law. The first was structure and involved the rearranging of tax legislation into a more logical order. The second was language and involved the use of contemporary English. The third was the correction of minor anomalies and the legislating of some extra statutory concessions and accepted practices.

Implications for NICs

Both re-writes have implications for NICs. This is because, over the years, certain areas of NICs legislation, particular those dealing with the liability of employed earners and the collection and reporting mechanisms for earnings related NICs, have been aligned with equivalent tax legislation. The main implications of the re-writes are:

  • the introduction of a new tax concept - ‘employment income’

    For NICs purposes this is the most significant change. ITEPA introduces the concept of ‘employment income’ and provides that it comprises two elements - “general earnings” and “specific income”. As part of the modernising of the language the term “emolument” has disappeared. The word ‘emolument’ featured extensively within NICs legislation where alignment has been achieved.

  • the removal of the charge to tax under Schedule E

    ITEPA replaced the ‘charge to tax under Schedule E’ with a charge to tax on general earnings. The expression ‘Schedule E’ also featured extensively within NICs legislation.

  • re-arranging the order

    Both re-writes rearranged and re-numbered all of the Schedule E provisions and associated Employment regulations. Most of the NICs alignments and collection procedures referred to ICTA 1988 and the Employment Income Regulations.

  • minor changes

    Although the TLR aim is to give a clearer meaning to tax law without changing its effect or underlying policy, minor changes were made. Typically these involved correcting small errors, legislating extra statutory concessions or deleting material which was no longer necessary. These changes needed to be reflected in equivalent NICs legislation.

Changes to NICs legislation

To accommodate the TLR changes, amendments were needed to both primary and secondary NICs legislation.

Changes to primary legislation

Changes necessary to NICs primary legislation were included in Schedule 6 to ITEPA 2003 and ensured that existing links with tax legislation were maintained. Broadly, the changes involved the substitution of the words ‘general earnings’ for ‘emoluments’ and the replacing of the phrase ‘chargeable to income tax under Schedule E’ with the phrase ‘chargeable to income tax on general earnings’.

The new wording does mean, however, that NICs legislation now contains two uses of the word “earnings”:

  • earnings for NICs purposes and
  • general earnings for tax purposes

To avoid potential conflict with the NICs definition contained in section 3 of the Social Security Contributions and Benefits Act 1992 (SSCBA 92) an interpretation of the phrase ‘general earnings’ was inserted into section 122 of SSCBA 92. Although, in most cases, a payment that meets the tax definition of general earnings will also be earnings for NICs purposes, the different definitions can lead to marginal differences. Guidance on the tax definition is provided in the Employment Income Manual (EIM) and on the NICs definition in the National Insurance Manual (NIM)

Changes to NICs secondary legislation

The largest amount of change needed was to NICs secondary legislation, including the Northern Ireland equivalents. This was because it is within NICs subordinate legislation that most of the existing tax/NICs alignments are located. The changes ranged from simple substitutions of ICTA references for equivalent ITEPA references, to more complex re-drafting of entire regulations in order to reflect the more modern language of ITEPA.

All of the TLR inspired changes to NICs secondary legislation were included in the Social Security (Contributions, Categorisation of Earners and Intermediaries) (Amendment) Regulations 2004 (SI2004/770), which came into affect from 6 April 2004.

The requirement to amend NICs legislation as a result of the new TLR enactments has had a consequential effect on NICs-related guidance. The effect on the NIM is explained at NIM00006.