On 21 April 2016 HMRC launched a consultation to gather views and evidence from companies with non tax-advantaged share schemes about whether there is a need for the continued availability of a NIC election.
This consultation has now been completed and HMRC has published the responses.
When an employee makes a gain on exercise of an employment-related securities option, or realises some other chargeable event under sections 426, 438 or 479 Income Tax (Earnings and Pensions) Act 2003 (ITEPA), this is treated as earnings liable for Class 1 National Insurance Contributions (NICs) under section 4(4)(a) Social Security Contributions and Benefits Act 1992 (SSCBA). There will be a liability to pay both a primary and secondary Class 1 NIC. For simplicity, the terms ‘employee’ and ‘employer’ are used, whereas the law stipulates these to be the ‘earner’ and ‘secondary contributor’ respectively. A primary Class 1 contribution is payable by the employee with a secondary Class 1 contribution payable by the employer. There are occasions however, when the employee meets the secondary Class 1 NICs liability.
At present there are two routes for the secondary Class 1 NICs liability to be met by the employee by either:
a NIC agreement; or a NIC electionSchedule 1 paragraph 3A SSCBA provides for the employer and employee to enter into a “NIC agreement”. Alternatively, Schedule 1 paragraph 3B SSCBA provides for the employer and employee to enter jointly into a “NIC election”. Unlike a NIC agreement, a NIC election constitutes the legal transfer of liability for payment of secondary Class 1 NICs from the employer to the employee. The law requires that any such election must be approved by HMRC.
Having considered the responses generated by the consultation, the government will not be taking any further action. Whilst there has been a change to the US accounting rules, it is clear that there is still a need to retain the NIC elections facility. They provide a protection that is not provided under NIC agreements.
