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HMRC internal manual

National Insurance Manual

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NICs avoidance: employment income provided through third parties: Class 1 NICs liability arises

Regulation 22B of the Social Security (Contributions) Regulations 2001 (SI 2001 No 1004)

For income tax purposes, there will be an amount which counts as employment income of a current, former, or prospective employee (under Chapter 2 of Part 7A of ITEPA 2003) if four conditions are all met. These conditions are bulleted below.

  • An arrangement has come through the “section 554A gateway” (that is the conditions in section 554A(1) of ITEPA 2003 are satisfied) - see EIM45025, and
  • A “relevant third person” has taken a “relevant step”. A relevant step is an action which gives rise to Part 7A income by reason of the current, former, or prospective employee’s employment with the employer - see EIM45055.

However, a relevant step only gives rise to Part 7A income if it is taken by a relevant third person - see EIM45025 

  • None of the exclusions in Chapter 1 of Part 7A of ITEPA 2003 prevent the relevant step from giving rise to Part 7A employment income. For guidance about these exclusions, see from EIM45200 onwards.
  • The reliefs in Chapter 2 of Part 7A of ITEPA 2003 do not reduce this employment income to nil.

On the calculation of Part 7A income, see from EIM45700 onwards.

For Class 1 NICs purposes, the amount which counts as employment income is treated as remuneration derived from an employment, and is therefore earnings. This is irrespective of whether the amount that is either earmarked, paid, or made available is something that would normally be chargeable to income tax under the benefits code. So, where a third party makes an asset available to an employee without transferring ownership and section 554D of ITEPA applies, Class 1 NICs are due, not Class 1A NICs. For guidance about section 554D of ITEPA, see EIM45080 

If the amount that counts as employment income is already earnings for NICs purposes, then it is unnecessary to consider whether Part 7A applies. That is because the amount that is already earnings should be included in gross earnings when assessing Class 1 NICs.