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HMRC internal manual

National Insurance Manual

Class 1 NICs: Expenses and allowances: Business expenses

“Earnings” is defined in section 3(1) of the Social Security Contributions and Benefits Act 1992 as including “any remuneration or profit derived from an employment”.

In order to be earnings, therefore, a payment must constitute salary or other personal benefit or gain to the employee and must be derived from the employment. See NIM02010.

The reimbursement of an expense which an employee has to incur in carrying out his employment does not represent any such personal benefit or gain, so does not constitute earnings. To confirm this, paragraph 9 of Part VIII of Schedule 3 to the Social Security (Contributions) Regulations 2001 (SSCR2001) provides:

“For the avoidance of doubt, there shall be disregarded any specific and distinct payment of, or contribution towards, expenses which an employed earner actually incurs in carrying out his employment”.

This serves to put the matter beyond doubt and ensures that payments made to cover business expenses incurred by an employee can be excluded from gross pay for NICs purposes.

However, from 6 April 2016, paragraph 9 of Part VIII to Schedule 3 was amended so that business expenses that are paid or reimbursed through salary sacrifice or using an ‘unapproved scale rate’ cannot be disregarded when calculating an employed earner’s earnings. Such payments will now be treated as earnings for Class 1 NICs purposes (by regulations 22(12) and (13) of the SSCR2001). See NIM05015.

There is one other exception to this general rule and that concerns the amount of business mileage expenses that can be paid without incurring a NICs liability. Detailed guidance on how mileage allowances are dealt with for NIC purposes can be found at NIM05801 et seq.

Payments derived from employment which are made to cover other personal expenses, including payments to cover private mileage and excess business mileage payments, are gains or benefits to the employee and are, therefore, earnings. These must be included in gross pay when calculating Class 1 NICs unless they are specifically excluded from liability by any other provision in Schedule 3 to the Social Security (Contributions) Regulations 2001.