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HMRC internal manual

National Insurance Manual

Class 1 NICs: Earnings of employees and office holders: Third party claims for damages - payments other than Statutory Sick Pay

If an employee has an accident or suffers an injury as a result of an incident involving a third party and their employer continues to pay their earnings while they are off work sick, include the earnings in gross pay for Class 1 NICs purposes.

In most instances employees will be entitled to Statutory Sick Pay (SSP) and, according to contractual arrangements, may also receive Occupational Sick Pay (OSP) for a period of time - usually geared to length of service with the employer

Where an employee claims damages from the third party, they are sometimes asked by the employer to make some form of restitution to the employer, but that does not change the character of the payments already provided to the employee, these are still earnings.

Include any such payments in gross pay if:

  • the employer does not have to pay the employee while they are sick as a result of an accident, but does so while the employee claims loss of earnings as damages from the party responsible for the accident; and
  • the employee does not have to repay the employer.

It is sometimes indicated that there is a ‘loss of earnings’ following an accident, but that is something for employee/employer and acting solicitor(s) to resolve between them. Where SSP/OSP are paid, those are earnings for NICs purposes

Occasionally the employer may pay nothing during an absence other than SSP. There may be no contractual right to anything other than the employer meeting this statutory obligation. In such instances the employer may provide a loan to the employee but if that is so and the employee genuinely has to repay that loan (even if a damages claim is unsuccessful) then the payment is not earnings. The normal rules for loans should be followed, NIM02210. Loans should not be included in gross pay when calculating Class 1 NICs.

However, if at a later date, the employer decides to write-off the outstanding loan so that the employee no longer has to repay it, add the amount written-off to any other earnings received by the employee in the pay period in which the employer decides to write-off the debt. Class 1 NICs should be assessed on the total amount received in that pay period.