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HMRC internal manual

National Insurance Manual

HM Revenue & Customs
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Class 1 NICs: Employment-Related Securities: securities: notional payments: tax paid by employer

Regulation 22(4) of the Social Security (Contributions) Regulations 2001

When an employee receives a notional payment, such as securities, the employer is required to account for income tax through PAYE. If, at the time the notional payment is made an employee has little, or no, cash earnings from which the employer can recover the income tax due then the employer must account for the balance to HMRC. This is a payment of earnings and would normally fall to be included in the employee’s gross pay. However, paragraph 17 of Part 10 to Schedule 3 SSCR 2001 disregards in the calculation of earnings a payment of income tax for which an employer is required to account for under section 710(1) of the Income Tax (Earnings and Pensions) Act 2003 (notional payments: accounting for tax). An employee then has up to 90 days after the end of the tax year (i.e. 6 July) to repay the employer the tax paid on their behalf. If all, or some, of the tax is not repaid within that period, section 222(2) treats the outstanding amount as earnings.

An amount which is treated as earnings by virtue section 222(2) ITEPA 2003 is also treated as earnings for NIC purposes.

In summary, where income tax is paid by the employer in relation to a notional payment, the income tax and NIC rules allow an employee until 90 days after the end of the tax year (i.e. 6 July) in which to reimburse the employer. If he fails to do so, any tax not repaid is treated as earnings and, for NICs, should be aggregated with any other earnings the employee receives in the earnings period containing the 6 July.


An employee is monthly paid and his normal gross pay is £10,000. On 16 August he exercises an option to acquire shares worth £50,000 on which income tax and NICs must be accounted for. On 31 August, his total monthly earnings are £60,000 of which only £10,000 is cash. The amount of income tax due is, say, £24,000, that is £4,000 due on the cash earnings and £20,000 due on the notional payment. Assuming the employer deducts £10,000 by way of tax - £4,000 in relation to the cash and £6,000 in relation to the notional payment the employee has until 90 days after the end of the tax year (i.e. 6 July) to reimburse his employer the balance of £14,000. If he fails to do so, £14,000, or less if he has paid some back, must be aggregated with any other earnings due in that earnings period. So if nothing has been repaid, the employee’s earnings for month ending 31 July will be £14,000 plus his salary with the total of £24,000 liable for Class 1 NICs.