Many employers account for tax on relocation packages through a
PAYE Settlement Agreement (PSA). This allows them to account for
the tax in a lump sum after the end of the tax year and avoids them
having to enter into detailed administrative arrangements to report
the individual sums involved.
PSAs were introduced in April 1996 but legislation to align
the NICs treatment of items put through a PSA was not introduced
until 6 April 1999. It was not possible to introduce the
legislation earlier as it needed primary legislation. Before the
necessary NICs legislation could be introduced an employer was
required, for NICs purposes, to identify the precise amounts
payable to individual employees and to account for these through
the payroll at the time of payment. This was very onerous compared
to the PSA arrangements.
When the legislation was introduced to align the treatment of
relocation expenses from 6 April 1998 it was known that the NICs
treatment of items included in a PSA for tax was to be aligned with
the tax treatment from 6 April 1999. It was therefore felt to be
unreasonable to expect employers to set arrangements in place just
for the 1998/99 year to account for the NICs on the taxable
allowances. The arrangements would be needed only for the 1998/99
year because from April 1999 the employer would be able to pay a
global amount of NICs in respect of all taxable expenses after the
end of the tax year in similar manner to the tax on the PSA.
An additional provision was accordingly introduced to exclude
from Class 1 NICs any taxable expenses included in a PSA for the
1998/99 year.
The original provision was included in regulation
19(1)(zc)(iii) of the Social Security (Contributions) Regulations
1979 and it continues in force in relation to any payments arising
in relation to 1998/99 but which might not yet have been
identified.
Although many taxable expenses will satisfy the criteria for
inclusion in a PSA because they will be minor, irregular or are
such that it would be impracticable for an employer to identify
them and put them through the payroll, some allowances will not
meet these criteria. See
NIM18000 for general information about
PSAs and NICs.
Additional housing cost allowances (AHCA) or mortgage
subsidies – usually paid to employees who move to a more
expensive location – are usually paid over a substantial
period of time, regularly and together with other pay. They will
not generally satisfy the criteria for inclusion in a PSA and they
will not, therefore, be excluded from NICs by virtue of the special
provision introduced for 1998/99. Nor will they be capable of being
excluded from NICs from 6 April 1998 under the relocation alignment
provision since they are taxable expenses.
You may encounter instances where AHCA payments are genuinely
irregular in nature and are deemed to be suitable for inclusion in
a PSA. If you are in any doubt about whether or not an allowance
should be in a PSA make enquiries to find out why the payment has
been included so that a consistent approach is adopted for both tax
and NICs.
