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HMRC internal manual

National Insurance Manual

Class 1 NICs: Expenses and allowances: Introduction

Regulation 25 and Schedule 3 to the Social Security (Contributions) Regulations 2001

Regulation 25 and Schedule 3 to the Social Security (Contributions) Regulations 2001 (SSCR 2001) provide for certain payments to be disregarded from liability for Class 1 NICs.

These provisions cater for a range of payments made to an employee in specific circumstances to be excluded from the calculation of earnings for NICs purposes. In addition to the particular exclusions for different types of expenses and allowances paragraph 9 of Part VIII of Schedule 3 provides for the exclusion of “any specific and distinct payment of, or contribution towards, expenses which an employed earner actually incurs in carrying out his employment.”

The assessment of NICs liability on payments of expenses has long been an area which has created problems for staff, employers and accountants.

The majority of cases involving expenses payments are normally straight-forward and it is usually easy to identify payments which are specific business expenses.

Situations which have caused problems are usually those where a payment by an employer covers items which have both a private and a business element. The most common examples are probably the payment of home telephone bills and fuel expenses. Where these payments are involved it often proves difficult to identify the business and private usage

Some of the exclusions mentioned in this section refer to similar exclusions provided for income tax. Where a tax exemption is quoted the relevant tax provision will be shown in its current form within the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003). Where a particular tax exemption preceded ITEPA 2003, the previous Income and Corporation Taxes Act (ICTA 1988) reference is given.

Similarly, where cross references are given to existing tax guidance both the new Employment Income Manual and the previous Schedule E manual paragraph numbers are shown.

Position from 6 April 2016

From 6 April 2016, expenses and allowances will be regarded as earnings, and liable for Class 1 NICs, if they are paid or reimbursed by salary sacrifice (other than relevant motoring expenditure within the meaning of Regulation 22A(3) SSCR 2001), an unapproved scale rate, or as part of a round sum allowance (see NIM05015).

A new disregard, Regulation 8A, of Part VIII to schedule 3, has also been introduced which disregards from earnings any paid or reimbursed expenses that are exempted from Income Tax under section 289A of ITEPA 2003. Under section 289A certain expenses that are paid or reimbursed, but not by salary sacrifice, an ‘unapproved’ scale rate, or by round sum allowance, are exempted from income tax. The new NICs disregard mirrors this.