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HMRC internal manual

National Insurance Manual

Class 1 NICs: Securities: Convertible securities

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

The acquisition of convertible securities is a payment of earnings liable for Class 1 NICs provided the securities 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 not take account of the value of the right to convert.

A further Class 1 NICs liability arises when:

  • the securities are converted into securities of a different description; or
  • the securities are disposed of for consideration; or
  • entitlement to convert is released for consideration; or
  • an associated person receives money or money’s worth in respect of the entitlement to convert.

Section 436 of the Income Tax (Earnings and Pensions) Act 2003 says that employment-related securities are convertible securities if;

  • they carry an entitlement for the holder to convert them into securities of a different description. The securities are convertible securities even if the entitlement to convert is subject to the satisfaction of conditions; or
  • an entitlement to convert is or may be granted by contract, agreement, arrangement or other condition as well as under the Articles of Association of the company whose securities are being issued; or
  • a contract, agreement, arrangement or condition allows the securities to be converted by someone other than the person holding the securities.

The amount of earnings is determined by paragraph 7 of Schedule 2 of SSCR 2001 which says that these are computed in the same manner and at the same time as in Chapters 1 to 5 or Part 7 of ITEPA 2003. No NICs disregard is available if the employee agrees or elects to meet the secondary Class 1 liability.

ERSM40080 explains more about convertible securities.