NIM02015 - Class 1 NICs : Earnings of employees and office holders : Liability for Class 1 NICs

Section 6 Social Security Contributions and Benefits Act 1992

Section 6(1) of the Social Security Contributions and Benefits Act 1992 provides that:

“Where in any tax week earnings are paid to or for the benefit of an earner over the age of 16 in respect of any one employment of his which is employed earner’s employment –

1. a primary Class 1 contribution shall be payable in accordance with this section and section 8 below if the amount paid exceeds the current primary threshold (or the prescribed equivalent); and
2. a secondary Class 1 contribution shall be payable in accordance with this section and section 9 below if the amount paid exceeds the current secondary threshold (or the prescribed equivalent).”

Section 3(1) of the Social Security Contributions and Benefits Act 1992 defines “earnings” for the purposes of NICs. See NIM02010

It follows that for a liability to pay Class 1 NICs to arise both section 3 and section 6 need to be satisfied:

• a payment must be “remuneration or profit derived from an employment” in order to be considered earnings for the purposes of NICs, and
• the earnings must be paid to or for the benefit of the employee and must exceed a particular level (the earnings threshold).

NICs are payable on all payments of earnings made in the form of:

• coin of the realm
• foreign currency
• cheque
• girocheque
• postal order
• direct transfer to a bank.

This list is not exhaustive.

Challenge to the interpretation of section 6(1) of the Social Security Contributions and Benefits Act 1992

Our interpretation of the wording of section 6(1) was recently challenged in the High Court in the case of RCI Europe v Woods. The decision in that case was given in December 2003 and confirmed our view of section 6(1).

The challenge was based on the use of the word “is” in section 6(1) in the phrase “which is employed earner’s employment”. Our view has always been that “is” simply identifies that the employment from which the earnings derive has to be employed earner’s employment rather than self-employment. RCI challenged this interpretation and held rather that “is” is used in a temporal sense and therefore restricts Class 1 NICs liability to payments made at a time when employment exists. RCI maintained that as the restrictive covenant payments which they had made were paid after the employment had ended, they could not be liable for NICs.

The High Court decision supported our view of section 6(1). Payments of earnings which arise out of employed earner’s employment will therefore continue to attract a liability for Class 1 NICs in accordance with section 6(1) even if they are paid before the employment commences or after it has ended.

A review of RCI Europe v Woods can be found on the legal website under tax case review, TCR07/03.