HMRC internal manual

National Insurance Manual

NIM02110 - Class 1 NICs: Earnings of employees and office holders: Damages

An employer or former employer may, from time to time, have to pay ‘damages’. For NIC purposes, these will be payments made to compensate an employee for loss of earnings for some reason. They will not be earnings for NICs purposes because they are not made for acting as an employee, or because an individual is an employee. They are rather due because of some other reason.

They may include payments made :

  • in advance, or in anticipation, of legal proceedings taken by the employee against the employer; or
  • to forestall, or in lieu of legal proceedings (that is, where it is intended to settle the matter or dispute by mutual agreement).

‘Damages’ will not, however, include any contractual payment which an employer is forced to make – for example, where an employer has to pay overdue or disputed wages. Any such payments will be ‘earnings’ for NICs purposes. See NIM07000 for further information regarding payments made under employment legislation.

The following examples of ‘damages’ situations are not exhaustive, but employers could make such payments in connection with anticipated, intended or threatened legal proceedings to offer or seek financial satisfaction against unfair dismissal, or to compensate for an accident or injury sustained at work.

The employer will normally pay damages after negotiations so there is no obligation to pay or expectancy of payment as of right. Therefore they are not remuneration or profit from an employment. As they are not earnings for the purposes of section 3(1) of the Social Security Contributions and Benefits Act 1992 no NICs are due. See NIM02010 for guidance regarding the meaning of ‘earnings’.