From 6 April 2003 all expenses and allowances listed in the relevant sections of Chapter 7 of Part 4 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003) are excluded from tax, providing certain conditions are satisfied. Prior to 6 April 2003 these same expenses and allowances were excluded from tax by virtue of Schedule 11A to the Income and Corporation Taxes Act 1988 (ICTA 1988) providing the same conditions were satisfied.
Following the introduction of legislation to align the NICs position with the treatment for tax with effect from 6 April 1998 (see NIM06115) these expenses and allowances are also excluded from the calculation of earnings for Class 1 NICs purposes. But this is only the case where the employee starts a new job on or after 6 April 1998. For guidance on the position prior to that date see NIM06125.
To qualify for exemption from tax and NICs expenses must be those listed at section 272 ITEPA 2003. Prior to 6 April 2003 such expenses were listed in Schedule 11A to ICTA 1988 and were referred to as “eligible expenses”. Exempt expenses basically fall into six categories:
For periods from 6 April 2003 see EIM03108 for guidance on the various categories of expenses included within section 272 ITEPA 2003. See SE03108 for equivalent guidance for all periods prior to 6 April 2003.
In order to qualify for exemption from tax the expenses have to be included within section 272 ITEPA 2003 and satisfy a number of conditions. For periods prior to 6 April 2003 the expenses had to have been 'eligible expenses' within the meaning of Schedule 11A ICTA 1988 and satisfy the same conditions. The conditions are:
From April 2003, if a removal expense satisfies the above
conditions then, subject to a limiting amount (see below) it is
exempt from tax.
Prior to 6 April 2003 if the removal expense was an eligible expense and it satisfied the above conditions it was considered a qualifying expense and was exempt from tax, providing the limiting amount was not exceeded (see below).
The first two conditions identified above apply equally to the
exclusion from NICs in respect of relocation allowances. The
relevant legislation is currently comprised in paragraphs 2(3)-2(5)
of Part VIII of Schedule 3 to the Social Security (Contributions)
However, when Class 1 NICs were aligned with the tax provisions, the time limit reflected in the third qualifying condition listed above was not introduced into the NICs exclusion. This is now reflected in paragraph 2(7) of Part VIII of Schedule 3.
The position for NICs is therefore that a payment can be excluded from earnings regardless of when the payment is made as long as it satisfies the first two tax conditions set out above. This means that Class 1 NICs will not be payable on a payment which :
Any relocation expenses which are paid but which are not identified in section 272 ITEPA 2003 (or, prior 6 April 2003, were not identified as eligible expenses within Schedule 11A ICTA 1988)must be included in the calculation of earnings for NICs purposes in the normal way. See NIM06150 for a list of some of the more common items which would not be capable of satisfying the tax exemption.
For tax purposes section 287 ITEPA 2003 (previously Schedule 11A
ICTA 1988) imposes a ” limit on the tax exemption. This limit
effectively caps the exemption which can be allowed for tax in
respect of the value of the expenses and benefits incurred in
relation to a particular relocation. The current limit is set at
£8,000. Where an employee receives a relocation package where
the value of the expenses and benefits exceeds £8,000 only the
first £8,000 is actually exempt from tax.
When NICs were aligned with the tax treatment from 6 April 1998, the monetary limit which operates in respect of the tax exemption was not introduced for the purposes of NICs.
This limit therefore does not feature in the legislation for Class 1 NICs and paragraph 2(7) of Part VIII of Schedule 3 to the Social Security (Contributions) Regulations 2001 specifically directs that for the purposes of Class 1 NICs section 287 of ITEPA 2003 is ignored. Prior to 6 April 2003 paragraph 2(7) of Part VIII required that Schedule 11A ICTA 1988 was to be read as if paragraph 24 (the qualifying limit provision for tax) was omitted.
Although the £8,000 limit does not operate for Class 1 NICs purposes it is relevant to Class 1A NICs from 6 April 2000. From that date, where an employee receives relocation expenses and benefits which are in excess of the £8000 limit they will generally be liable for Class 1A NICs. See NIM16251 for further information regarding Class 1A liability.