Class 1 NICs: Expenses and allowances: changes from 6 April 2016
From 6 April 2016, the Social Security (Contributions) (Amendment) (No. 2) Regulations 2016 (SI 2016/352), amended the Social Security (Contributions) Regulations 2001 (SI 2001/1004) for the NICs treatment of expenses and allowances paid by salary sacrifice, at an ‘unapproved’ scale rate, or where they form part of a round sum allowance. This mirrors the income tax treatment of expenses and allowances introduced by sections 289A – 289E of ITEPA 2003.
The Social Security (Contributions) Regulations 2001 (SSCR 2001) is amended as follows:
- New regulation 22(12) treats as earnings any paid or reimbursed expenses (other than relevant motoring expenditure within the meaning of regulation 22A(3)) paid to an employed earner when provided through salary sacrifice as defined by section 289A(5) of ITEPA 2003.
Section 289A(5) of ITEPA 2003 defines salary sacrifice in relation to an employee who receives an amount of paid or reimbursed expenses as being an arrangement under which:
- the employee gives up the right to receive an amount of general earnings or specific employment income in return for the payment or reimbursement, or
- the amount of other general earnings or specific employment income received by the employee depends on the amount of the payment or reimbursement.
If expenses or allowances are paid or reimbursed using a salary sacrifice arrangement then they will also be treated as earnings for Class 1 NICs purposes.
- New regulation 22(13) now treats as earnings any amount paid or reimbursed to an employed earner in respect of expenses which is calculated according to a set rate rather than by reference to the actual amount incurred, if this rate is not contained in regulations made under section 289A (6)(a) of ITEPA 2003, or is not approved by HMRC under section 289B of ITEPA 2003.
Under section 289B of ITEPA an employer must apply to HMRC for approval to pay or reimburse expenses at a set rate. If HMRC is satisfied that the proposed rate is a reasonable estimate of the amount of expenses actually incurred, then HMRC may approve the scale rate and issue the employer with an ‘approval notice’ which specifies the terms of the approval. If there is reason to do so an approval can be revoked. An approval can be revoked retrospectively (under section 289C ITEPA 2003) and any Class 1 NICs due from the date of revocation will then be due.
A scale rate payment that is not approved by HMRC (i.e. an unapproved scale rate) will be treated as a round sum allowance (see NIM06160) and regarded as earnings for Class 1 NICs purposes.
Schedule 3 to the Social Security (Contributions) Regulations 2001 contains provisions that allow for certain paid or reimbursed expenses to be disregarded from the calculation of earnings for Class 1 NICs purposes. However, this Schedule has also now been amended by adding a new paragraph 1A and qualifying each of the relevant disregard provisions so that any amount paid or reimbursed to an employed earner using a salary sacrifice arrangement, an unapproved scale rate, or by round sum allowance, as outlined above, cannot be disregarded when calculating earnings. In those circumstances Class 1 NICs will be due on the amount paid or reimbursed.