ERSM170710 - PAYE & NICs
Chronology of NICs legislation
The history of National Insurance Contributions (NICs) as it affects employment-related shares and other securities is complex and a summary is set out below:
Legislation before 7 November 1991
Legislation which took effect from 7 November 1991
Legislation which took effect from 6 April 1995
Legislation which took effect from 5 December 1996
Legislation from 22 September 1998
Legislation from 1 October 1998
Legislation from 25 November 1998
Legislation which took effect from 6 April 1999
Legislation amended/inserted by The Social Security Act 1998
Legislation from 10 October 2000
Legislation from 10 April 2003
Legislation from 16 April 2003
Legislation from 1 September 2003
Legislation from 1 August 2004
Legislation from 1 September 2004
Legislation from 22 September 2004
Legislation before 7 November 1991
| Legislation | Description |
|---|---|
| Section 3(1) and 3(3) of Social Security Act 1975. & Reg. 19(1)(d) of Social Security (Contributions) Regulations 1979 | Shares and share options derived from employment are earnings. However all were disregarded from NICs as they fall to be defined as payments in kind. Payments in kind are disregarded from earnings by virtue of regulation 19(1)(d). |
Legislation which took effect from 7 November 1991
Legislation amended/inserted by the Social Security (Contributions) Amendment (No. 6) Regulations 1991 (SI 1991 No. 2505)
| Legislation amended/inserted | Description |
|---|---|
| Reg. 18(2)-(5) of SSCR 1979 | Sets out how to calculate the amount of earnings on which Class 1 NICs are due when shares and or share options attract a NICs liability. |
| Reg. 19(1)(d) and Reg. 19(5) and Schedule 1A of Social Security (Contributions) Regulations 1979 | Reg. 19(5) and Schedule 1A list payments that cannot be disregarded from earnings even though they are payments in kind. Shares and share options are now liable to Class 1 NICs subject to exceptions below. |
| Reg. 19(1)(l) & (m) SSCR 1979 | Specifically disregards “own company” shares and/or share options and shares obtained under a profit sharing scheme from earnings. |
| Reg. 19(7) Social Security (Contributions) Regulations 1979 | Provides definitions of words/terms used in Reg. 19(1)(l), for example “body corporate”, “company”, etc. |
Legislation which took effect from 6 April 1995
Legislation amended/inserted by the Social Security (Contributions) Amendment (No.4) Regulations 1995 (SI 1995 No. 3031)
| Legislation amended/inserted | Description |
|---|---|
| Reg. 18(9) Social Security (Contributions) Regulations 1979 | Provides for earnings to be calculated by reference to the amount obtainable under trading arrangements. |
| Schedule 1A, paragraph 19 | Introduces “trading arrangements’’ and defines this as having the meaning assigned to it in section 203K(2) ICTA 1988. |
Legislation which took effect from 5 December 1996
Legislation amended/inserted by the Social Security (Contributions) Amendment (No. 6) Regulations 1996 (SI 1996 No. 3031)
| Legislation amended/inserted | Description |
|---|---|
| Reg. 18(2), (7A), (8) & (9) SSCR 1979 | Sets out how to calculate the amount of earnings on which Class 1 NICs are due when NICs liability arises on shares and or share options. Amendments take account of trading arrangements and make provision for the consideration the employee pays to acquire the shares/options to be deducted from the amount on which NICs were due. |
| Reg. 19(1) (l) & (m) SSCR 1979 | 19(1)(l) amended to reflect the fact that only own company shares a) acquired under an IR approved scheme or b) were non-tradeable could be disregarded from earnings for Class 1 NICs purposes. All own company shares, which are unapproved and tradeable and non-own company shares derived from employment, are subject to Class 1 NICs. |
| Reg. 19(1) (l) & (m) SSCR 1979 | 19(1)(m) amended to reflect the fact that only options to acquire shares which are a) acquired under an IR approved scheme or b) non tradeable options over non tradeable shares can be disregarded from earnings for Class1 NICs purposes. All other options derived from employment are subject to Class 1 NICs. |
| Reg. 19(7)(f), (7g) and (7A) | These provide definitions of key words in Reg.19 (1)(l) & (m) and also provide a definition of “non-tradeable”. |
Legislation from 22 September 1998 {#}
Legislation amended/inserted by The Social Security (Contributions) Amendment (No.4) Regulations 1998 (SI 1998 No. 2320)
| Legislation amended/inserted | Description |
|---|---|
| Reg. 19(1)(mm) SSCR 1979 | A new Paragraph that disregards from earnings, gains made on exercise, assignment, release of a share option, i.e. amounts on which income tax is due under section 135 of ICTA 1988. Rationale being that the change of treatment of gains from share option would align with the tax treatment from the beginning of a tax year i.e. 6 April 1999. |
Legislation from 1 October 1998
Legislation amended/inserted by the Social Security (Contributions) Amendment (No. 3) Regulations 1998 (SI 1998 No.2211)
| Legislation amended/inserted | Description |
|---|---|
| Reg. 1(2) Social Security (Contributions) Regulations 1979 | Defines “conditional interest in shares”, “convertible shares” and “RCAs”. Definition of RCAs in section 203F(2) of ICTA 1988. |
| Reg. 17AB Social Security (Contributions) Regulations 1979 | Treats as earnings amount chargeable to tax under Schedule E in respect of the acquisition, on or after 9/4/98, of shares or an interest in conditional and convertible shares (S 140A to 140H ICTA 1988) where shares are RCA’s. |
| Reg. 18(6), (8) – (15) SSCR 1979 | Amendments made to the calculation of the amount of earnings on which Class 1 NICs are due to take account of the RCA, conditional and convertible shares legislation. Unforeseen impact means NICs not due on share options at all until rectified 25 November 1998. |
| Reg. 19(1)(l) & (m) SSCR 1979 | Amended to reflect RCA legislation. So, own company shares/options, which are not RCAs, are disregarded from earnings for Class 1 NICs purposes. |
| Reg. 19(1)(zd)-(zg) of SSCR 1979 | Some provisions relating to conditional and convertible shares which allow for certain payments to be disregarded from earnings. Reg. 19(1)(zd)(iii) disregards from earnings shares appropriated under an IR approved profit sharing scheme within section 186 of ICTA 1988. |
| Reg. 19(5)(b), Schedule 1A and Schedule 1B of SSCR 1979 | Amendments to take account of the fact that NICs legislation refers to the RCA legislation in ICTA 1988. |
Legislation from 25 November 1998
Legislation amended/inserted by The Social Security (Contributions) Amendment (No. 5) Regulations 1998 (SI 1998 No.2894)
| Legislation amended/inserted | Description |
|---|---|
| Reg. 18(2A), (2B), (5A), (9A) SSCR 1979 | Makes provision for calculating the amount of earnings that Class 1 NICs are due on share options which are RCAs. |
Legislation which took effect from 6 April 1999
Legislation amended/inserted by Section 50(1) of The Social Security Act 1998
| Legislation amended/inserted | Description |
|---|---|
| Section 4(4)(a) SSCBA 1992 | Treats as earnings any gains on which an earner is chargeable to tax by virtue of section 135 of ICTA 1988 (i.e. gains on exercise, release or assignment of share options). |
| Section 4(6) SSCBA 1992 | Makes provision for regulations to be made to deem as earnings any amount on which the earner is, by virtue of any provision of S140A to 140H of Income and Corporation Taxes Act 1988, chargeable to income tax under Schedule E. |
Legislation amended/inserted by The Social Security Act 1998
| Legislation amended/inserted | Description |
|---|---|
| Para 3 of Schedule 1 of the SSCBA 1992 | Power for the making of regulations to extend the employer’s right of recovery of primary NICs from non-monetary earnings paid to ex-employees. |
Legislation amended/inserted by The Social Security Contributions, Statutory Maternity Pay and Statutory Sick Pay (Miscellaneous Amendments) Regulations 1999 (SI 1999No. 567)
| Legislation amended/inserted | Description |
|---|---|
| Reg. 18(2), (2A), (2B), (4), (5), (5A) & (9A) SSCR 1979 | Amendments made to reflect that NICs due on same amounts chargeable to income tax. |
| Reg. 18(16) | Calculates the earnings on gains realised on the assignment or release of share options which are not RCAs, i.e. have not exercised options but have received a payment for assigning or releasing their right. |
| Reg. 18(17) – (19) | Makes provision for determining the amount of earnings on which class 1 NICs are due where options are rolled over for other options where there are gains on rollover. |
| Reg. 18(20) | Defines some terms/words used in Reg.18(16)-(19). |
| Reg. 19(1)(mm) SSCR 1979 | Para omitted as this made a provision to disregard gains made on exercise of share options between 8 September 1998 and 5 April 1999. From 6/4/99 NICs due on gains determined under section 135 of ICTA 1988 section 4)(4)(a) SSCBA 1992 now applies. |
| Reg. 19(1)(zh) SSCR 1979 | Disregards from earnings payments by way of gains realised by exercise of share options and on the grant of a long option granted after 6/4/99 for shares that are not RCAs. |
| Reg. 19(1)(zi) SSCR 1979 | Disregards from earnings payments by way of the grant of short options obtained on or after 6/4/99. |
| Reg. 19(1)(zj) SSCR 1979 | Makes provision for no NICs to be charged at the time that post April 1999 options are exercised for conditional shares, which are conditional for more than 5 years. NICs will be due when the conditions are lifted. |
| Reg. 19(1)(zk) SSCR 1979 | Makes provision for no NICs to be charged where rights to acquire conditional/convertible shares were granted before 9/4/98. |
| Reg. 19(1)(zl) & (zm) SSCR 1979 | Disregards from earnings post April 1999 gains re pre April 1999 options where: - a) rolled over for other options where there are no gains: b) cancelled for cash and c) exercised for gain. |
| Reg. 19(11) SSCR 1979 | Defines some words/terms used in Reg. 19(11) & (1)(zh), (zl) and (zm). |
| Paras (3B) to (3G) of Para 13 of Schedule 1 of SSCR 1979 | Makes provision for employers to recover from ex-employees primary NICs due on the proceeds from non-monetary earnings. |
Legislation from 28 July 2000
Legislation amended/inserted by the Child Support, Pensions and Social Security Act 2000
| Legislation amended/inserted | Description |
|---|---|
| Para 3A and 3B of Schedule 1 SSCBA 1992 | Makes provision for secondary NICs liability on share option gains to be paid by or transferred to the employed earner, for gains from 28 July 2000. |
Legislation from 10 October 2000
Legislation amended/inserted by The Social Security (Contributions) (Amendment No. 10) Regulations 2000 (SI 2000 No.2744)
| Legislation amended/inserted | Description |
|---|---|
| Reg. 19(zv) Social Security (Contributions) Regulations 1979 | Disregards from earnings the payment of secondary NICs liability, which had been transferred from the secondary contributor to the employed earner, where the primary contributor does not meet that liability. |
| Reg. 46B Social Security (Contributions) Regulations 1979 | Explains what Schedule 1ZA of SSCR 1979 contains (about elections transferring secondary NICs liability on share options gains to the primary contributor). |
| Para 6(2) & (3) Schedule 1 SSCR 1979 | Amends provision about being able to deduct NICs from primary contributors to take account of the fact that where an election is made, secondary NICs can be deducted from the primary contributor’s share option gains. |
| Para 13ZA Schedule 1 SSCR 1979 | Sets out the records the secondary contributor must keep where secondary NICs liability is transferred from secondary contributors to the primary contributor on share option gains. |
| Para 26A(3), 28E, 30ZA, 32(7) Schedule 1 Social Security (Contributions) Regulations 1979 | Amends the provisions in Schedule 1 about payments and recovery of NICs to take account of secondary NICs liability transferred from secondary contributors to the primary contributor on share option gains. |
| Schedule 1ZA Social Security (Contributions) Regulations 1979 | The main provisions about elections iro share option gains. For example, it states what must be included in an election, how the election should be made, etc. |
Legislation from 6 April 2001
Legislation amended/inserted by The Social Security (Contributions) (Amendment No. 3) Regulations 2001 (SI 2001 No.596)
| Legislation amended/inserted | Description |
|---|---|
| Reg. 18 & 19 SSCR 2001 | Reg. 18 and 19 are substituted by new Reg. 18 and 19s. They introduce 2 new Schedules, Schedule 1ZB (calculation of earnings for the purposes of earnings-related NICs in particular cases) and Schedule 1ZC (payments to be disregarded in the calculation of earnings for the purposes of NICs). |
| Paras 1, 2, 4, 5, 7-12 Schedule 1ZB SSCR 1979 | Relevant Paras relating to shares/options |
| Parts I, II, III Paras 1 & 6 of Part IV, Part IX, Para 3 Part X Schedule 1ZC SSCR 1979 | Relevant Paras relating to shares/options |
| Part IX Schedule 3 Social Security (Contributions) Regulations 1979 | Includes payments disregarded under approved schemes, for example Enterprise Management Incentives, share ownership plans, etc. |
With effect from 6 April 2001 the Social Security (Contributions) Regulations 1979 (SI1979 No. 591) and the Northern Ireland equivalent were consolidated into the Social Security (Contributions) Regulations 2001 (SI 2001 No. 1004)
| Principal legislation relating to shares/options | Description |
|---|---|
| Schedule 2 Social Security (Contributions) Regulations 2001 | Calculation of earnings for the purposes of NICs formerly Regulation 18 SS(C) R 1979. |
| Part III Schedule 3 SSCR 2001 | Payments by way of RCAs not disregarded as payments in kind, i.e. so Class 1 NICs are due. |
| Para 1& 6 of Part IV Schedule 3 SSCR 2001 | Payments by way of shares/options not disregarded as payments in kind. |
| Part IX Schedule 3 SSCR 2001 | Lists all the shares/options disregarded from earnings for Class 1 NICs purposes. |
| Para 3 Part X Schedule 3 SSCR 2001 | Disregards from earnings a payment discharging liability for secondary Class 1 NICs following election under Para 3B of Schedule 1 to the SSCBA 1992. |
| Schedule 4 Social Security (Contributions) Regulations 2001 | Sets out the rules relating to the deduction, recovery, and payment of NICs as well as an employer’s responsibilities for accountability. |
| Schedule 5 Social Security (Contributions) Regulations 2001 | Elections about share option gains. |
Legislation from 11 May 2001
| Legislation amended/inserted | Description |
|---|---|
| The Social Security Contributions (Share Options) Act 2001 | The Social Security Contributions (Share Options) Act 2001 does not amend any legislation. It allowed employers to settle any NICs liability on share options granted to employees and directors between 6 April 1999 and 19 May 2000. |
| The Social Security Contributions (Share Options) Regulations 2001 (SI 2001 No. 1817) | The Social Security Contributions (Share Options) Act 2001 contains provisions for the limitation of liability to pay NICs in respect of gains arising on the exercise, assignment or release of certain share options. For these provisions to be used, a notice must be given to IR within 92 days of 11 May 2001. The regulations make provisions relating to such notices. For example, Reg. 3 sets out what must be contained in such notices. |
Legislation from 26 July 2001
The Social Security (Contributions) (Amendment No. 5) Regulations 2001 amends The Social Security (Contributions) Regulations 2001 (SI 2001 No. 2412)
| Legislation amended/inserted | Description |
|---|---|
| Para 3A Part IX Schedule 3 Social Security (Contributions) Regulations 2001 | When SSCR 1979 were consolidated into SSCR 2001 missed out provision in Reg. 19(1)(zi) of SSCR 1979. Para 3A makes provision for disregarding a payment of earnings by way of the grant of short options on or after 6/4/99. |
Legislation from 6 April 2003
| Legislation amended/inserted | Description |
|---|---|
| Income Tax (Earnings and Pensions) Act 2003 | Legislation introduced at Income Tax (Earnings and Pensions) Act 2003 consolidating the vast majority of taxes legislation since Income and Corporation Taxes Act 1988. Section 4(4)(a) SSCBA92 was amended by paragraph 172, Schedule 6 of ITEPA to reflect the new tax charging provision. |
Legislation from 9 April 2003
| Legislation amended/inserted | Description |
|---|---|
| Schedule 21 FA 2003 | Legislation in Schedule 21 FA 2003 in respect of Approved Share Schemes takes effect. |
Legislation from 10 April 2003
| Legislation amended/inserted | Description |
|---|---|
| Social Security (Contributions) (Amendment No 3) Regulations 2003 (SI2003/1059) | Social Security (Contributions) (Amendment No 3) Regulations 2003 (SI2003/1059) takes effect from 10 April 2003. Amends Schedule 2 SS(C) R 2001 inserting new paragraph 11A which explains how to calculate earnings where value of shares increased for non-commercial reasons. Amends Paragraph 16 Part IX of Schedule 3 and introduces new Paragraph 17 which imposes a new test. Payments from pre 6 April 1999 options not disregarded if value of shares increased by more than 10% for non-commercial reasons. |
Legislation from 16 April 2003
| Legislation amended/inserted | Description |
|---|---|
| Schedule 22 FA 2003 | Publication of the Finance Bill. The following new Chapters in Part 7 ITEPA 2003 become effective: Chapter 3A – acquisition charge, Chapter 3B, Chapter 3C, Chapter 3D, Chapter 4, Chapter 5 – other securities options. Section 4(4)(a) SSCBA92 was amended to reflect the new tax charging provision within Chapter 5. |
Legislation from 10 June 2003
| Legislation amended/inserted | Description |
|---|---|
| The Social Security (Contributions) (Amendment No 4) Regulations 2003 (SI 2003/1037) | Effective from this date. Amends Paragraph 7 of Schedule 4 to SS(C) R 2001 and extends the recovery rights of employer in relation to recovery of primary NIC. |
Legislation from 10 July 2003
| Legislation amended/inserted | Description |
|---|---|
| Finance Act 2003 | Finance Act 2003 receives Royal Assent. New definition of Readily Convertible Assets comes into effect. |
Legislation from 1 September 2003
| Legislation amended/inserted | Description |
|---|---|
| Schedule 22 FA 2003 | Remaining Provisions of Schedule 22 FA 2003 take effect: Known as the ‘Appointed Day’. Chapter 2 – Restricted Securities, Chapter 3 - Convertible Securities, Chapter 3A – in relation to restricted & convertible securities, Chapter 5 – Share Options, PAYE due on all shares scheme charges. |
| The Social Security (Contributions) (Amendment No 5) Regulations 2003 (SI2003/2085) | The Social Security (Contributions) (Amendment No 5) Regulations 2003 (SI2003/2085) effective from this date. Makes a series of amendments to NICs legislation to mirror the impact of FA 2003 including changes to: Regulation 2(1) – definitions/interpretations, Regulation 22 – amounts to be treated as earnings, Schedule 2 – calculation of earnings, Schedule 3 – Payments to be disregarded/payments not to be disregarded in the calculation of earnings. |
Legislation from 6 April 2004
| Legislation amended/inserted | Description |
|---|---|
| The Social Security (Contributions, Categorisation of Earners and Intermediaries) (Amendment) Regulations 2004 (SI2004/770) | The Social Security (Contributions, Categorisation of Earners and Intermediaries) (Amendment) Regulations 2004 (SI2004/770) take effect. Amends Regulation 40 SS(C) R 2001 to reflect that Class 1A is not due on securities that are not readily convertible assets. This was an unintended omission from 1 September 2003. – see TB SE 7 December 2003. |
Legislation from 6 April 2004
| Legislation amended/inserted | Description |
|---|---|
| The Income Tax (Pay as You Earn) Regulations 2003 (SI 2003/2682) | The Income Tax (Pay as You Earn) Regulations 2003 (SI 2003/2682) come into effect. |
Legislation from 1 August 2004
| Legislation amended/inserted | Description |
|---|---|
| The Tax Avoidance Schemes (Prescribed Descriptions of Arrangements) Regulations 2004 SI2004/1683; and Tax Avoidance Schemes (Information) Regulations 2004 SI2004/1864; and Tax Avoidance Schemes (Promoters and Prescribed Circumstances) Regulations 2004. | Requirement to notify IR of tax advantaged schemes involving amongst others securities or associated rights or payments made to trustees/intermediaries for the benefit of an employee. |
Legislation from 1 September 2004
| Legislation amended/inserted | Description |
|---|---|
| The Social Security (Contributions) (Amendment No. 4) Regulations 2004 (SI 2004/2096) | The Social Security (Contributions) (Amendment No. 4) Regulations 2004 (SI 2004/2096) take effect. Defines ‘relevant employment income’ at Regulation 1(2) SS(C)R2001 in relation to RCAs. Amends Para 7 of Schedule 2 to reflect that the tax relieving provisions relating to the payment of secondary NICs under election by employee do not relate to the calculation of earnings for NICs purposes. |
Legislation from 22 September 2004
| Legislation amended/inserted | Description |
|---|---|
| The Social Security (Contributions) (Amendment No 5) Regulations 2004 | The Social Security (Contributions) (Amendment No 5) Regulations 2004 take effect. Further amendment to Paragraph 7 of Schedule 4 SS(C)R2001. Extends the recovery rights of an employer to enable him, with employee’s agreement, to retain or sell securities to meet the primary NICs liability. |