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HMRC internal manual

National Insurance Manual

Class 1 NICs : Earnings of employees and office holders : Meaning of "earnings"

Section 3 Social Security Contributions and Benefits Act 1992

Section 3(1) of the Social Security Contributions and Benefits Act 1992 provides that “earnings” includes “any remuneration or profit derived from an employment”. Remuneration includes salaries, wages, and other forms of reward such as bonuses, commission, tips, etc.

In order to be earnings, therefore, a payment must:

  • constitute salary or other personal benefit or gain to the employee, and
  • be derived from the employment.

The meaning of “earnings…derived from an employment” has not been specifically tested before the General or Special Commissioners or in the courts, but on several occasions it has been held that in order to determine whether or not something constitutes “earnings” for the purpose of NICs, we can look towards the principles established for income tax purposes with regard to “emoluments”.

We regard the meaning of “earnings” and “emoluments” as broadly similar.

In April 2003, The Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003), which came out of the work of the Tax Law Rewrite Project, replaced all of the existing Schedule E legislation within the Income and Corporation Taxes Act 1988 (ICTA 1988), including the word “emolument”. Rather than imposing a charge to tax on emoluments and/or treated emoluments, ITEPA 2003 imposes a charge to tax on “employment income”.  Employment income consists of both:

  • general earnings (which, in large part, represents what was formerly referred to as ‘emoluments’ and/or ‘treated emoluments’) and
  • specific employment income.

Although ITEPA 2003 presents tax law in a clearer language, it broadly retains the effect of the Schedule E legislation. This means that principles established in tax caselaw, including those relating to the meaning of the term emolument, remain valid.

Detailed guidance on the new charge to tax can be found in the Employment Income Manual.  An explanation of the effects of both ITEPA 2003 and the ongoing Tax Law Rewrite project on NICs can be found at NIM00006.

The leading tax cases are:

  • Hochstrasser v Mayes (38TC707)
  • Shilton v Wilmshurst (64TC78)
  • Laidler v Perry (42TC351)
  • Hamblett v Godfrey (1987) STC60.

See EIM00700 and EIM00750 (SE00600) and EIM00690 (SE00690) for information with regard to the decisions in these cases.

See also EIM00530(SE00530) for guidance regarding the money’s worth principle and EIM00580 (SE00580) for an explanation of the pecuniary liability principle.