NIM13171 – Class 1A National Insurance contributions: Liability for Class 1A NICs: Identifying whether a benefit has been provided: Definition of a benefit in kind for NIC purposes

Regulation 25 and paragraph 1 of Part 2 of Schedule 3 to the SS(C)R 2001

For NICs purposes, the way in which an employer provides something to an employee will normally determine whether a


  • payment of earnings has been made on which Class 1 NICs are due, or
  • benefit in kind has been provided on which Class 1A NICs are due.

As any amount of general earnings, or anything treated as general earnings for tax purposes, (before 6 April 2003 – emoluments chargeable to income tax under Schedule E) may attract a Class 1A NICs liability if there is no existing Class 1 or Class 1B NICs liability, it is important to establish the correct NICs liability on anything provided to an employee, see NIM13160.

The starting point for this is to establish whether the item provided has been disregarded from earnings for Class 1 NICs purposes. If the item has been disregarded, it is likely to attract a Class 1A NICs liability unless the item


  • has been specifically excluded from Class 1A NICs liability, see NIM14001, or
  • it is included in a PAYE Settlement Agreement, see NIM14400.

To do this it is necessary to consider the wording of the legislation that disregards certain payments from earnings on which Class 1 NICs are due and in particular the regulation which disregards benefits in kind. The relevant legislation is Regulation 25 and paragraph 1 of Part 2 of Schedule 3 to the SS(C)R 2001. Although the wording of the NICs legislation talks in terms of a ‘payment in kind’ this is taken to be the equivalent of the tax expression ‘benefit in kind’.

Subject to specific exceptions, paragraph 1 of Part 2 of Schedule 3 provides that


”A payment in kind, or by way of the provision of services, board and lodgingsor other facilities is to be disregarded in the calculation of earnings.”

The payments in kind which are not disregarded are those assets listed in Parts 3, 4 or 5 of Schedule 3 to the SS(C)R 2001 and are those that have been specifically regulated into Class 1 NICs liability, see NIM04002.

There is no statutory definition for NICs of the term ‘payment in kind’. As a result, it is necessary to draw a distinction between items which, when given to an employee, can be turned into cash only by sale and which depend upon there being a willing buyer and mutually agreed price, and items which can be turned into cash by surrender. Items which are


  • turned into cash only by sale are payments in kind, and therefore disregarded from earnings for Class 1 purposes, for example, giving an employee a television
  • converted into cash by surrender are earnings not disregarded for Class 1 purposes, for example, giving an employee Premium Bonds.

Although both the television and the Premium Bonds are general earnings chargeable to income tax under ITEPA 2003 (before 6 April 2003 - emoluments chargeable to income tax under Schedule E), for the purposes of NICs, the


  • television attracts a Class 1A NICs liability because it can only be turned into cash by sale to a willing buyer for a mutually agreed price. The television is disregarded from earnings as a payment in kind.
  • Premium Bonds attract a Class 1 NICs liability because the employee can turn the bonds immediately into cash by surrender at the Post Office. The Premium Bonds cannot be disregarded from earnings as a payment in kind.

The distinction drawn here should not be confused with an employee’s ability to give up a benefit in exchange for additional cash, which is explained at SE00570 and NIM16650.