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HMRC internal manual

PAYE Settlement Agreements

National Insurance Contributions and PAYE Settlement Agreements


The legislation put in place for the assessment and collection of Class 1B NICs cameinto effect on 6 April 1999. This means that for 1999/2000 onwards NICs due on appropriateitems included in a PSA are calculated on a global rather than individual basis in linewith the calculation of tax due.

The text of section 10A of the Social Security Contributions and Benefits Act 1992, isreproduced below and is followed by an explanation of each paragraph.


‘’Class 1B contributions


(1) Where for any tax year a person is accountable to the Inland Revenue in respect ofincome tax on general earnings of his employees in accordance with a PAYE settlementagreement, a Class 1B contribution shall be payable by him for that tax year in accordancewith this section.

(2) The Class 1B contribution referred to in subsection (1) above is payable in respect of

  • (a) the amount of any of the general earnings included in the PAYE settlement agreement which are chargeable emoluments; and
  • (b) the total amount of income tax in respect of which the person is accountable for the tax year in accordance with the PAYE settlement agreement.

(3) The amount of the Class 1B contribution referred to in subsection (1) above shallbe the Class 1B percentage of the aggregate of the amounts mentioned in paragraphs (a) and(b) of subsection (2) above.

(4) General earnings are chargeable emoluments for the purposes of subsection (2) aboveif, apart from section 6(2A) or 10(8A) above, the person accountable in accordance withthe PAYE settlement agreement would be liable or entitled to pay secondary Class 1contributions or Class 1A contributions in respect of them.

(5) Where

  • (a) the PAYE settlement agreement was entered into after the beginning of the tax year; and
  • (b) Class 1 contributions were due in respect of any general earnings before it was entered into,

those general earnings shall not be taken to be included in the PAYE settlementagreement.

(6) In subsection (3) above “the Class 1B percentage” means a percentage rateequal to the secondary percentage for the tax year in question.

(7) The Treasury may by regulations provide for persons to be excepted in prescribedcircumstances from liability to pay Class 1B contributions.”


Paragraph (1) means that a Class 1B NICs liability will arise where an employer is liableto tax in accordance with a PSA

Paragraph (2) means that Class 1B is payable on

  • (a) items within a PSA that would ordinarily attract Class 1 or 1A NICs, and
  • (b) the total (grossed-up) tax payable under the PSA.

Paragraph (3) means that the amount payable will be calculated as a percentage of theamounts attracting Class 1 or 1A NICs liability, and the total (grossed-up) tax under thePSA.

Paragraph (4) means that Class 1B NICs are payable in respect of all items for which theperson accountable for tax under the PSA agreement would ordinarily be liable or entitledto pay Class 1 or 1A NICs.

Paragraph (5) (a) and (b) means that where Class 1 NICs were due to be paid before a PSAagreement is made for a year, Class 1 NICs must be accounted for in the normal way, andcannot be replaced by Class 1B NICs.

It is not possible for Class 1A NICs liability to arise before a PSA agreement is inplace, because Class 1A liability arises after the end of the tax year, and after the 6July deadline by which a PSA agreement must be made.

Paragraph (6) means that the percentage rate used to calculate Class 1B NICs is set at thesame level as the secondary Class 1 NICs percentage rate.

Paragraph (7) means that in some circumstances, employers may be excepted from Class 1BNICs liability and these exceptions will be prescribed by regulation.