NIM02200 - Class 1 NICs: Earnings of employees and office holders : Holiday pay

Include holiday pay in gross pay unless:

• the employer has previously deducted it from earnings on which tax and NICs have already been paid; or
• it comes from an independently managed central fund to which several employers contribute. The employee may receive these payments through their employer or direct from the fund.

Independently managed central holiday pay schemes

The largest independently managed fund is the Building and Civil Engineering Industries Holiday Pay Scheme but similar schemes are common in the construction industry and were also growing within other organisations.

Under such a scheme, each employer associated with the particular scheme can stamp a special card for each employee with stamps bought from the managers of the scheme or can build up ‘credits’ in the scheme in respect of each employee. You should be careful not to confuse these ‘credit’ schemes with the holiday credit schemes discussed below.

Whether the holiday pay scheme operates on a stamps or credits basis the arrangements work in the same way – the only difference being that in the ‘credits’ arrangement the scheme managers keep details of the employee’s entitlement according to the number of credits accrued rather than according to the number of stamps on their stamp card.

Employers do not include the amount spent on the special stamps or credits in gross pay. When an employee takes a holiday they cash-in the stamps or credits with their current employer and he claims the money back from the management of the scheme. The employer disregards this holiday pay when calculating earnings for NICs purposes as such sums are specifically excluded from Class 1 NICs liability by virtue of regulation 25 and paragraph 12 of Part X of Schedule 3 to the Social Security (Contributions) Regulations 2001.

Paragraph 12 of Part X of Schedule 3 actually provides that a payment is to be disregarded where it is:

“A payment in respect of a period of holiday entitlement where –

1. the sum paid is derived directly or indirectly from a fund –

2. the person making the payment is entitled to be reimbursed from such a fund.”

Some schemes were introduced to take advantage of the NIC saving that could be made through the disregard, rather than to provide holiday pay in industries such as construction where short term mobile employments were common. From 30 October 2007 the ‘disregard’ was limited to companies who operate within construction operations and where the employees are personally engaged within such operations. The definitions fall within sections 59 and 74 of the Finance Act 2004 respectively.

The disregard will be withdrawn completely for all companies from 9 October 2012.

‘Holiday credit’ schemes

In a ‘holiday credit’ scheme, an employer sets aside money each pay day to pay the employee in a lump sum when they take a holiday. Such schemes may operate nationwide in many trades and industries but they are not the same as holiday pay schemes in the building and civil engineering and allied trades.

If an employer operates a ‘holiday credit’ scheme and the employee has:

• a right to the money set aside and could have it at any time, liability for NICs will arise when the credits are set aside because this is the point at which the money is put unreservedly at the disposal of the employee (this is when it is “paid”)
• no right to the money until they take their holiday, then NIC liability will not arise until the employee receives the holiday payment because this is the point at which the earnings are paid.

If you are in any doubt about the liability position in respect of any holiday scheme you should refer full details to your Technical Support Manager for advice.