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HMRC internal manual

National Insurance Manual

Class 1 NICs: Securities: Securities acquired for less than market value

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

The acquisition of a payment by way of employment-related securities for no consideration or less than market value is a payment of earnings A Class 1 NICs liability arises provided the securities are readily convertible assets (see NIM06835) and 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.

However, if an employee acquires employment-related securities for which he pays nothing or less than market value until the employer makes a call for payment, a notional loan is created under Chapter 3C of Part 7 of the Income Tax (Earnings and Pensions Act) 2003. A potential Class 1A NICs liability arises on the deemed notional loan itself and unless the employee makes full payment a Class 1 NICs liability arises when the loan is discharged.

Interest on the deemed notional loan

The deemed notional loan is aggregated with any other beneficial loans the employee has and under Chapter 7 of Part 3 of ITEPA 2003 a tax charge may arise. Where such a charge does occur, section 10 SSCBA 1992 imposes a Class 1A NICs liability on the same amount of general earnings chargeable to tax.

Discharge of deemed notional loan

The deemed notional loan is treated as discharged when the securities are sold or the outstanding amount is no longer required from the employee. The amount treated as employment income is the market value of securities when acquired by the employee less any consideration given. The same amount which counts as employment income is also treated as earnings liable for Class 1 NICs provided section 698 of ITEPA 2003 (PAYE: special charges on employment-related securities) applies.

ERSM70140 et seq explains more about securities acquired for less than market value.