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HMRC internal manual

National Insurance Manual

Class 1 NICs: Securities: Restricted securities and restricted interest in securities

Regulation 22(7) of the Social Security (Contributions) Regulations 2001

An employee may acquire employment-related securities, or an interest in securities, subject to certain restrictions, for example, they may not be sold for a certain period and/or may be subject to forfeiture. Restricted securities have the meaning given in section 423 of the Income Tax (Earnings and Pensions) Act 2003. This explains that securities are restricted if there is there is a restriction on the freedom to sell the securities or if there is any contract, agreement, arrangement or condition which makes provision as to transfer, reversion or forfeiture if certain circumstances arise or do not arise or there is a restriction on the disposal of the securities.

The acquisition of restricted securities is a payment of earnings. If they are not subject to forfeiture and are readily convertible assets (see NIM06835) paragraph 5(5) to Schedule 2 of SSCR 2001 explains that the amount of earnings is the best estimate that can reasonably be made of the amount of general earnings in respect of the provision of the securities. This will take account of the effect that the restrictions have on the value of the securities.

A further Class 1 NICs liability arises by virtue of regulation 22(7) of SSCR 2001 when the restrictions are removed. This serves to treat as earnings an amount which counts as employment income and to which section 698 of ITEPA 2003 applies (PAYE: special charges on employment-related securities). The amount of earnings is determined by reference to paragraph 7 of Schedule 2 to SSCR 2001 which says that these are calculated in the same way and at the same time as applies under Chapters 1 to 5 of ITEPA 2003. No NICs disregard is available if the employee agrees or elects to meet the secondary Class 1 liability.

The acquisition of securities, or an interest in securities, which are subject to forfeiture is disregarded in the calculation of earnings by virtue of paragraph 9 of Part 9 to Schedule 3 of SSCR 2001. A Class 1 NICs liability arises when the risk of forfeiture is removed. The amount of earnings is determined as above.

However, section 431 of ITEPA 2003 provides that the employer and employee can elect to ignore some or all of the restrictions and pay income tax and Class 1 NICs on the full market value of the securities at the time of acquisition as if there were no restrictions in place. The election must be approved by HMRC and is irrevocable.

ERSM30000 etc seq explains more about restricted securities.