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HMRC internal manual

National Insurance Manual

HM Revenue & Customs
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Class 1 NICs: Expenses and allowances: Employee liability insurance

Regulation 25 and paragraph 10 of Part 10 of Schedule 3 to the Social Security (Contributions) Regulations 2001

Company directors and officers and any employee may be subject to legal action undertaken by their employer or by a third party in respect of alleged or actual wrongful acts or omissions in their capacity as directors or employees. “Indemnity insurance” is available to cover damages and legal expenses arising out of such claims.

With effect from 18 July 1995, a specific provision was introduced into the Social Security (Contributions) Regulations to exclude from Class 1 NICs liability any payment which is exempt from tax by virtue of section 201AA of the Income and Corporation Taxes Act 1988 (ICTA 1988). That tax exemption is now contained at section 346 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003). Although the NICs disregard was introduced only from 18 July 1995, the effect of the legislation was applied from 6 April 1995. This was achieved by not seeking to collect any arrears identified in connection with such payments.

See SE30501 and SE30505 for guidance on section 201AA ICTA 1988 and, for periods from 6 April 2003, EIM30501 and EIM30505 for guidance on section 346 of ITEPA 2003.

The outcome of the NICs legislation is that where an employer meets the liability of a director or employee arising out of legal action for alleged wrongful acts or omissions, or meets the cost of indemnity insurance (either by arranging for cover or by reimbursing or meeting the cost of premiums in connection with insurance taken out by the employee) then no Class 1 NICs will be due.

Currently the relevant legislation is contained in regulation 25 and paragraph 10 of Part 10 of Schedule 3 to the Social Security (Contributions) Regulations 2001.

No Class 1A liability will arise if no tax charge exists. See NIM13000 for guidance on the general principles relating to Class 1A liability.

Position from 6 April 2016

From 6 April 2016, the NICs disregard in paragraph 10 of Part X of Schedule 3 to the Social Security (Contributions) Regulations 2001 will not be available if the costs are met by the employer through a salary sacrifice arrangement, an unapproved scale rate, or as part of a round sum allowance (see NIM05015).