NIM15750 – Class 1A NICs: Calculating Class 1A NICs: Employee’s residency status for tax purposes not confirmed at the time payment of Class 1A NICs is due.

Before establishing whether an emolument is chargeable to Schedule E tax the employee’s residence status for income tax purposes has to be established, see SE42810.

Where residency for tax is confirmed and a Schedule E income tax charge arises, a Class 1A NICs liability will also arise, providing the necessary residency and presence conditions for the payment of NICs is satisfied, see NIM16400

Position for tax

For tax purposes, employees who are resident and ordinarily resident in the UK are treated as not resident and not ordinarily resident if they leave the UK to work full time abroad, provided their absence from the UK and their employment abroad both last for at least a whole tax year. Employees’ visits to the UK during their absence must total less than 183 days in any tax year and average less than 91 days a tax year.

For example, an employee who leaves the UK on 5th October 2000 will be treated as not resident and not ordinarily resident from 6 October 2000 provided, at 6th April 2002, he has remained in full time employment abroad and has satisfied the conditions as to his visits to the UK.

Position for Class 1A NICs

At 19th July, when Class 1A NICs are due to be paid, the strict position is that Class 1A NICs are due on emoluments which are chargeable to income tax under Schedule E.

Using the above example, Class 1A NICs are due on all benefits received by the employee for the year ending 5 4 2001, including the period from 6th October 2000. This is because the employee is unable to finally establish his residence status until 6 April 2002. As the employee is chargeable to income tax under Schedule E, Class 1A NICs are due on the benefits received for the period after the employee left the UK. In practice, tax would not be pursued for the period from 6th October 2000 to 5th April unless there was a change in intention or other circumstances.

Assessing Class 1A NICs on a provisional basis

Where at the time Class 1A NICs are due to be paid an employee’s residency status for tax purposes has not been finally established, employers can calculate their Class 1A NICs on a provisional basis. This is done on an administrative basis and is undertaken by reference to the employee’s expected residency status. Employers do not have to pay Class 1A NICs on benefits provided to employees for periods for which there is genuine expectation that the employee will satisfy the conditions for being treated as not resident for tax purposes.

To apply this administrative arrangement an employer must be able to show that he has genuine expectation that the conditions described above will be satisfied. This will usually be clear from the terms under which the employee is to be engaged overseas.

Where non-residency status does not arise and an employer has provisionally calculated his Class 1A NICs, he must calculate and pay over any outstanding Class 1A NICs due.

Where an employer chooses to pay Class 1A NICs ahead of an employee’s residency status for tax purposes finally being established a refund of the overpayment can be sought, see NIM17090.