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HMRC internal manual

National Insurance Manual

Class 1 NICs: Earnings of employees and office holders: Holiday pay

Regulation 25 and paragraph 12 of Part 10 of Schedule 3 to the Social Security (Contributions) Regulations 2001 (SI 2001 No 1004)

Include holiday pay in gross pay unless

  • the employer has previously deducted it from earnings on which tax and NICs have already been paid; or
  • it comes from an independently managed central fund to which several employers contribute. The employee may receive these payments through their employer or direct from the fund.

Independently managed central holiday pay schemes

The largest independently managed fund is the Building and Civil Engineering Industries Holiday Pay Scheme but similar schemes are common in the construction industry.

Under such a scheme, each employer associated with the particular scheme can stamp a special card for each employee with stamps bought from the managers of the scheme or can build up ‘credits’ in the scheme in respect of each employee. You should be careful not to confuse these ‘credit’ schemes with the holiday credit schemes discussed below.

Whether the holiday pay scheme operates on a stamps or credits basis the arrangements work in the same way - the only difference being that in the ‘credits’ arrangement the scheme managers keep details of the employee’s entitlement according to the number of credits accrued rather than according to the number of stamps on their stamp card.

Employers do not include the amount spent on the special stamps or credits in gross pay. When an employee takes a holiday they cash-in the stamps or credits with their current employer and he claims the money back from the management of the scheme. The employer disregards this holiday pay when calculating earnings for NICs purposes as such sums are specifically excluded from Class 1 NICs liability by virtue of regulation 25 and paragraph 12 of Part 10 of Schedule 3 to the Social Security (Contributions) Regulations 2001 (SI 2001 No 1004).

Paragraph 12 of Part 10 of Schedule 3 actually provides that a payment is to be disregarded where it is

“A payment in respect of a period of holiday entitlement where -

  1. the sum paid is derived directly or indirectly from a fund -



  1. to which more than one secondary contributor contributes, and
  2. the management and control of which are not vested in those secondary contributors, or


  1. the person making the payment is entitled to be reimbursed from such a fund.”

From October 2007 the legislation was amended to bring the use of schemes more in line with the original Parliamentary intention; that they should only be used by construction companies where their employees are personally involved in construction operations at the time the holiday pay accrues. In showing the types of employment that are construction operations the definitions are lifted from section 74 of the Finance Act 2004 and these are used for the purposes of the revised Construction Industry Scheme.

Employers now have a statutory obligation to pay holiday pay to employees, so that these schemes have now in part outlived the original purpose; though some still have a form of benefits scheme linked to them.

For that reason, although holiday pay schemes may still operate thereafter, the disregard from NICs liability is withdrawn by legislation after 30 October 2012.

It follows, therefore, that only holiday pay which comes directly or indirectly from a fund held by a holiday pay scheme can be disregarded when calculating NICs to the 30 October 2012. If, instead of stamping a card or buying credits, an employer pays holiday pay to his employees out of his own resources then the usual rules will apply in respect of calculating NICs on those amounts.

‘Holiday credit’ schemes

In a ‘holiday credit’ scheme, an employer sets aside money each pay day to pay the employee in a lump sum when they take a holiday. Such schemes may operate nationwide in many trades and industries but they are not the same as holiday pay schemes in the building and civil engineering and allied trades.

If an employer operates a ‘holiday credit’ scheme and the employee has

  • a right to the money set aside and could have it at any time, liability for NICs will arise when the credits are set aside because this is the point at which the money is put unreservedly at the disposal of the employee (this is when it is “paid”)
  • no right to the money until they take their holiday, then NIC liability will not arise until the employee receives the holiday payment because this is the point at which the earnings are paid.

If you are in any doubt about the liability position in respect of any holiday scheme you should refer full details to your colleagues that provide technical support in your work area and request advice.