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HMRC internal manual

National Insurance Manual

Class 1 NICs: Securities: Introduction

It is not unusual for employers to have share plans in place to reward, incentivise and retain employees. These can provide for the award of shares or the grant of share options. Since 1 September 2003, shares fall within the wider definition of securities - see NIM06822

The tax charging provisions on employment-related securities are contained in Part 7 of the Income Tax (Earnings and Pensions) Act 2003. Part 7 was substantially amended by Schedule 22 to the Finance Act 2003. Subsequent changes were also introduced in Social Security legislation to ensure consistency between the income tax and National Insurance treatment of payments by way of securities.

For NICs, a payment by way of employment-related securities is a payment in kind and payments in kind are disregarded in the calculation of earnings. However, securities are specifically excluded from this disregard and provisions within the Social Security Contributions and Benefits Act 1992 and Social Security (Contributions) Regulations 2001 explain how to determine the amount of earnings liable for Class 1 NICs.

The treatment delivered through employment-related securities follows the same principle that applies to other forms of earnings, such as cash. Generally, a Class 1 NICs liability, and income tax charge, arises at the time value passes to an employee.

Shares are the most common type of securities which an employee may acquire and any gains from this acquisition are chargeable to income tax and Class 1 NICs. But:

  • if an employee pays the full market value of a share which he acquires from his employer there will be no charge to income tax or liability for NICs.; or
  • an employee may acquire shares for some consideration and pay income tax and Class 1 NICs on the market value of the shares less any consideration paid; or
  • an employee may acquire shares through a scheme approved by HMRC to which special rules apply.

In other situations, an employee may be awarded shares with the arrangement structured so that value is acquired at some future point, contingent on some event or condition being fulfilled and as a reward for future services. An employee may also be granted a share option and when that option crystallises and the employee receives the benefit of that value, then the rules tax and NIC that value.