Transferring employers (secondary) National Insurance contributions (NICs) to employees - agreements and Joint NICs Elections

Contents

Background

On the 6 April 1999, NICs legislation was aligned with tax legislation so that a NICs liability would become due on gains following the exercise of share options. As a result of this change some employers faced difficulties in having to make provision for a future, unpredictable, uncapped employer NICs liability.

On 28 July 2000, the Child Support, Pensions and Social Security Act 2000 (CSPSSA) introduced legislation to allow employers to ask their employees to pay the employer's (secondary) NICs arising on share option gains. Prior to the CSPSSA employers were not allowed to pass on any employers NIC liabilities to their employees.

Finance Act 2003 made some further changes that extended the circumstances that an employer could ask their employees to bear the employer Class 1NICs.

Schedule 21 of the Finance Act 2003, made the early exercise of share options granted under an Inland Revenue Approved Company Share Option Plans (CSOPs) subject to PAYE and NICs. As a result of this NICs arising under such circumstances fell within the rules, allowing employers to ask their employees to pay any employers NICs that became due.

With the implementation of Chapter 5, Schedule 22 of the Finance Act 2003, agreements and joint elections were further extended to allow conditional awards from Long Term Incentive Plans (LTIPs) or similar schemes, including and all cash cancellation payments made to an employee for giving up their securities option.

Following changes made by Schedule 22, the term share option is now more commonly referred to as securities options and consequently new agreements and joint elections may need to reflect this change. Of course if the only security that an employer wants to provide an option over is shares in a company, then you may wish to continue using this term.

The National Insurance Contributions and Statutory Payments Act 2004, which received Royal Assent on 13 May, extended the use of Agreements and Joint Elections to cover awards made in restricted or convertible securities and this will be effective from 1 September.

In general, an Agreement or Joint Election will cover the following:

  • Options over securities (this includes qualifying share options for the purposes of Enterprise Management Incentives (EMI) in case of a disqualifying event occurring)
  • The early exercise of options over shares granted under a Company Share Option Plan (CSOP)
  • All cash cancellation payments made to give up the security option or restricted and convertible securities
  • Conditional awards (Long Term Incentive Plans - LTIPs)
  • Post-acquisition chargeable events applying to awards of restricted securities, and
  • Post-acquisition chargeable events applying to awards in convertible securities

The securities and securities options on which employer’s National Insurance Contributions becomes due must fall within the term 'Relevant employment income' and this is defined as:

  • an amount that counts as employment income of the earner under section 426 of ITEPA 2003 (restricted securities: charge on certain post-acquisition events),
  • an amount that counts as employment income of the earner under section 438 of that Act (convertible securities: charge on certain post-acquisition events), or
  • any gain that is treated as remuneration derived from the earner’s employment by virtue of section 4(4)(a) SSCBA 1992.

The transfer of employers NIC to the employee can be done in one of either two ways:

Agreements

  • This allows the employer and the employee to enter into an agreement that some or all of the employer's secondary NICs liability can be recovered from the employee without seeking approval from HMRC
  • Joint NICs Elections (One Part or Two Part) which allows the employer and the employee to enter into a joint election to legally transfer the liability for payment of the secondary NICs to the employee, but only after receiving approval from HMRC to do so.

Agreements

Under an agreement an employer is allowed to approach the employee and ask them if they would be prepared to pay any employer NICs liabilities arising from gains made from securities options and restricted or convertible securities awarded to the employee.

An agreement still requires the employer to be legally responsible for the payment of the employers NICs liability.

The agreement will normally be arranged so that the employer will pay the secondary NICs due but then seek recovery of the money back from the employee through their salary or any future payments due to the employee; or that the employee will make the necessary funds available at the time the gain occurs or shortly after, of an amount equivalent to the employers NICs that the employee has agreed to pay.

The form of agreement and the arrangements to pay the secondary NICs is a matter that will be determined between the employer and the employee. There is no need for HMRC involvement.

Frequently Asked Questions - Agreements

  1. What kind of payments can agreements cover?
  2. What Employers NICs can be recovered from the employee under an agreement?
  3. What format should the agreement take?
  4. How should the NICs be recovered from the employee?
  5. How does an employee receive the income tax relief when they pay their employer (secondary) NIC liability under an agreement?
  6. What happens if the employee does not reimburse the employer within 60 days of the end of the tax year in which the gain arose?

Joint NICs Elections

This allows an employer to make an application to HMRC for approval of a joint election to legally transfer the liability for secondary NICs to the employee. If approval is obtained, the employer and employee can jointly elect to transfer some or all of the secondary NICs liability arising on a securities option, or post-acquisition gains from restricted or convertible securities awarded by the employee. Elections can only be entered in to where HMRC have given formal approval of the joint election and is satisfied that the accompanying arrangements will result in the payments of secondary NICs by the employee being made on time.

The ability to make an election to transfer the liability has been introduced to overcome accounting difficulties for companies that report in the US, which would otherwise arise if the employer simply recovered the secondary NICs from the employee under an Agreement.

We have produced 2 Model Joint Election formats, a One-Part and Two-Part. There is also guidance on making a Joint Election.

Frequently Asked Questions – Joint NICs Elections

  1. What is a NIC Joint Election?
  2. What are the differences between a 'Joint Election' and an 'Agreement'?
  3. What format must the election be made in?
  4. Why are there two model formats?
  5. Is Inland Revenue approval needed before an election can be used?
  6. How does an employer make an application for approval?
  7. What payments can a joint NIC election cover?
  8. Can an election apply to share options granted under an EMI (Enterprise Management Incentive) or CSOP (Company Share Option Plan)?
  9. What amount of employers NICs can be transferred to the employee under a joint election?
  10. What must the election include?
  11. Can a practitioner or adviser send in a generic form of election for approval?
  12. Will individual elections have to be made with each employee?
  13. Will HMRC require a copy of the signed election?
  14. Will the employee need to complete separate payroll records?
  15. What type of arrangements will meet with HMRC approval?
  16. What information should be provided on the arrangements in order to obtain approval?
  17. What other information and necessary documents do I need to provide to HMRC?
  18. What happens if a group company administers the scheme but the employees belong to subsidiaries?
  19. Can I have more than one plan included in the joint-election?
  20. I already have an approved joint election but wish to make some changes to it. Do I need to approach HMRC before making the changes?
  21. How does an employee receive the income tax relief when they pay their employer’s NIC liability?
  22. Will the transfer of the NIC liability and the income tax relief have any impact on the amount on which Capital Gains Tax is calculated when I sell the shares?
  23. Will the income tax relief have any effect on the employee’s National Insurance liability?
  24. What if the employee agrees to pay the secondary NICs liability, but in the end the employer chooses to pay it instead – will the tax relief still be available?
  25. If the employer pays the secondary NICs, despite the NIC Election, will this be treated as a payment of earnings and trigger further tax and NIC liabilities?
  26. Has any change been made to the tax relief available to employees who pay their employer’s NIC liability on securities option gains?
  27. As an employing company I can get Schedule 23 Corporation Tax relief for the restricted and convertible shares acquired by my employees. Will that relief be affected if they agree to pay the employer’s (secondary) NICs liability on these shares?
  28. If the employee pays the employer’s NICs, will the employer lose CT relief for those NICs?
  29. Will the employee get any benefit advantage from paying the employer’s NICs?
  30. Can I transfer employer’s NICs to an employee if I have entered into a section 430 or 431 (ITEPA) joint tax election with my employee in relation to an award of restricted securities?
  31. How do I calculate the income tax and NICs due when an ex-employee exercises their options several months after leaving the company?
  32. How do I calculate the income tax and NICs due for an ex-employee when restrictions or conversions take place on their restricted or convertible securities several months after leaving the company?
  33. If an ex-employee (mentioned in the previous Q & A) exercises whilst working for another company, which company is responsible for collecting and paying the income tax and NICs?
  34. I already have a joint election in place with my employees but it is only for options, can I use it also for LTIPs without having to make a new election?
  35. When did the regulations come in to force formalising this process?

Further information

If you have any further queries please ring 020 7147 2843 or 2853.