SE12102 - Non-cash remuneration: NIC liability on earnings

PAYE and NIC alignment

Schedule 1A of the 1979 Social Security (Contributions) Regulations lists the assets on which an employer is required to operate NIC in cases of non-cash remuneration.

Broadly the assets are the same as those subject to PAYE on readily convertible assets, by virtue of Section 203F ICTA1988 (see SE11803) and so in many cases where non-cash remuneration is subject to PAYE, it will be subject to NIC for the same reasons.

However, in the past there was sometimes a mismatch between PAYE and NIC in non- cash remuneration cases, either because of the timing of introduction of new rules or because of differences of emphasis in NIC and tax legislation.

This was particularly the case before the tradeable asset rules (see SE12010), but even after those came into effect for PAYE on 25 May 1994, the mismatch continued because the equivalent rules for NIC apply only from 6 April 1995.

An example of a fundamental mismatch between tax and NIC applied when, before 6 April 1999, an employee was awarded an option over shares. The NIC charge arose only at the time the option was granted. In most instances there was no tax charge on grant but there was a Schedule E charge when the option was exercised. If the shares were readily convertible assets PAYE was due on exercise but NIC was due on grant. From 6 April 1999 both NIC and tax charges arise at the date of exercise.

NIC also applies to awards of readily convertible assets, although again there was a timing difference between the dates of introduction – for PAYE the readily convertible asset rules took effect from 6 April 1998, but for NIC they apply from 1 October 1998.

Further guidance on NIC

From 1995/96 onwards there has been an increasing degree of alignment between PAYE and NIC on non-cash remuneration schemes and in many cases the arguments applied to oblige an employer to operate PAYE and NIC are identical. However, this is not always the case and you should check in the first instance with Regional Technical Support Managers or Personal Tax (NI), Longbenton in cases of doubt or difficulty.

Even where the arguments are the same for PAYE and NICS, if an employer appeals against both liabilities on a payment of non-cash remuneration, and the appeal is heard by the Commissioners or Courts, the appeals will be based on different legislation (even though many of the NIC rules rely on the definitions used in tax law) and must be heard separately.