NIM02240 - Class 1 NICs - Earnings of employees and office holders : Mortgages and mortgage subsidies

Some employers provide mortgage subsidies for their employees. The NIC position depends on the particular circumstances.

Employee arranges a mortgage and the employer pays all or part of the payments

If an employee arranges a mortgage and the employer pays all or part of the payments to the employee or a building society or bank, then such payments are earnings and liable for Class 1 NICs. The employer is simply meeting or reimbursing the employee’s debt. See NIM02010 and NIM02015.

Where an employer is paying the increase in mortgage for an employee who relocated prior to 6 April 1998 to a more expensive part of the country and the move was to similar accommodation, for example from a two bedroom flat in one area to a two bedroom flat in another area, any payment which the employer makes to the increase in the mortgage may be excluded from NICs. This exclusion is only appropriate, however, where there has been no change in the relocation package.

If the employee relocated before 6 April 1998 but moved to accommodation of a higher standard, for example from a semi-detached house to a detached house, then only the increase which would have been payable if they had moved to similar accommodation is capable of being excluded from NICs. This exclusion will only be available where there has been no change in the relocation package.

For more information regarding the NIC liability of payments made on relocation – both before and from 6 April 1998 – see NIM06110

Employer arranges a mortgage and is liable for the payment to a bank or building society

If an employer arranges a mortgage and is liable for the payment to a bank or building society, this is a payment in kind and it will be excluded from earnings for Class 1 NICs purposes by virtue of regulation 25 and paragraph 1 of Part II of Schedule 3 to the Social Security (Contributions) Regulations 2001 [previously regulation 19(1)(d) of the Social Security (Contributions) Regulations 1979]. Although there will be no liability for Class 1 NICs such payments will be liable for Class 1A NICs. See NIM13000 for details of the general principles applying to Class 1A liability.

Employer takes-over the employee’s mortgage and contract transferred to the employer

If an employer takes-over the employee’s mortgage and the contract transfers to the employer, when calculating earnings for Class 1 NICs purposes you should disregard any payments the employer makes because these are payments in kind. There will be no Class 1 NICs liability on any such payments but there will be a Class 1A liability.

Employer contracts with the mortgage supplier that his employee will pay part of the mortgage repayments and the employer will pay the difference

If an employer contracts with the mortgage supplier that the employee will pay part of the mortgage repayments and the employer will pay the difference, when calculating Class 1 NICs you should disregard the amount the employer contracts to pay as a payment in kind. That amount will, however, attract Class 1A NICs.

Employer provides a subsidised mortgage

No Class 1 NIC liability arises if the employer provides a subsidised mortgage by lending an employee a sum of money at a fixed rate of interest of, for example, 5% or at a variable rate of interest which might be a constant 6% below the bank rate. There may, however, be a liability for Class 1A NICs.

Employer, having lent money to an employee for their mortgage, assigns the loan to a third party

If an employer, having lent money to an employee for their mortgage, assigns the loan to a third party, for example a bank or building society, the third party takes over responsibility for the loan and the employee will then make their repayments to that third party.

If the interest charged by the third party is higher than that which was charged by the employer, and the employer pays the difference in the interest, this payment must be included in gross pay for the purposes of calculating Class 1 NICs. The employer will, in such circumstances, simply be meeting part of the debt owed by the employee.