On 25 November 2001 the employer grants an employee an option, for £1 per share, over 1000 shares in the company's unapproved share scheme. The employer is a private company not listed on any exchanges. The option may be exercised between 26 November 2003 and 31 December 2008.

On 30 June 2003 the employer company is taken over and the new owner cancels the employer's existing option in return for a cash payment of £5,000.

A Class 1 NICs liability arises on the amount paid to the employee less anything paid for the grant of the option, in this case Nil. The amount subject to NICs is therefore £5,000.