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HMRC internal manual

National Insurance Manual

Class 1 NICs : Earnings of employees and office holders : Long service awards

Regulation 25 and paragraph 2(2) of Part II and paragraph 6 of Part V of Schedule 3 tothe Social Security (Contributions) Regulations 2001

Position from 6 April 2003.

The treatment of long service awards for Class 1 NICs purposes from 6 April 2003 isidentical to that existing at 6 April 2001- see below. The only difference is thelegislation under which the NICs exemption operates. With effect from 6 April 2003, ESCA22 became a statutory exemption as part of the Tax Law Rewrite project. ESC A22 is nowsection 323 of the Income Tax (Earnings and Pensions) Act 2003 and the NIC exemptionapplies if the award satisfies the conditions set out in that section. Guidance on the taxexemption is located at EIM 01500.

Position from 6 April 2001

With effect from 6 April 2001 the treatment of long service awards for Class 1 NICspurposes is totally aligned with the tax treatment.

From that date do not include in gross pay any award made by an employer to mark longservice of an employee if the award takes the form of an asset or a non-cash voucher andthe conditions set out in extra statutory concession (ESC) A22 for exemption from tax aresatisfied.

To qualify for exclusion the award must:

  • be made to mark long service
  • take the form of tangible assets or of shares in an employing company
  • be of reasonable cost (currently not exceeding £50 per year of service, but for awards made prior to 13 June 2003 not exceeding £20 per year of service)
  • be made in relation to a period of service of not less than 20 years

and no similar award must have been made to the recipient within the previous 10 years.

Class 1 NICs are therefore due on :

  • any award which is made in cash, or
  • any award, made other than in cash and which would normally attract a Class 1 NICs liability, which fails to meet the conditions in ESC A22.

Class 1A NICs will be due on other non-cash awards which do not satisfy the conditionsof ESC A22 (NIM14310 refers).

See SE01500 for further guidance on the application of ESC A22.

Position prior to 6 April 2001

The position prior to 6 April 2001 was that Class 1 NICs were generally due on awardsmade to mark long service if:

  • they were part of the employee’s contract of service, or
  • the employee could expect to receive such an award; for example, because it was the employer’s normal practice to make such awards.

A cash payment which was not contractual and which was totally unexpected would not,therefore, have been liable for Class 1 NICs.

From 6 April 1999 legislation was introduced to exclude from Class 1 NICs liability anynon- cash voucher awarded as a testimonial to mark long service of not less than 20 years.This provided for an exclusion to be available even if the award was part of the contractor was expected. The exclusion was, however, only available if no award for long servicehad been made within the previous 10 years and the cost of the provision of the voucherdid not exceed £20 per year of service.