NIM06120 - Class 1 NICs: Expenses and allowances: Relocation allowances: Employees who start work at the new location on or after 6 April 1998

Paragraphs 2(3)-2(5) of Part VIII of Schedule 3 to the Social Security (Contributions) Regulations 2001

Chapter 7 of Part 4 of the Income Tax (Earnings and Pensions) Act 2003

Schedule 11A to the Income and Corporation Taxes Act 1988

From 6 April 2003 all expenses and allowances listed in the relevant sections of Chapter 7 of Part 4 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003) are excluded from tax, providing certain conditions are satisfied. Prior to 6 April 2003 these same expenses and allowances were excluded from tax by virtue of Schedule 11A to the Income and Corporation Taxes Act 1988 (ICTA 1988) providing the same conditions were satisfied.

Following the introduction of legislation to align the NICs position with the treatment for tax with effect from 6 April 1998 (see NIM06115) these expenses and allowances are also excluded from the calculation of earnings for Class 1 NICs purposes.

Relocation expenses

To qualify for exemption from tax and NICs, expenses must be those listed at section 272 ITEPA 2003. Prior to 6 April 2003 such expenses were listed in Schedule 11A to ICTA 1988 and were referred to as “eligible expenses”. Exempt expenses basically fall into six categories:

  • disposal or intended disposal of old residence
  • acquisition or intended acquisition of new residence
  • transporting belongings
  • travelling and subsistence
  • domestic goods for the new residence
  • bridging loans.

For periods from 6 April 2003 see EIM03108 for guidance on the various categories of expenses included within section 272 ITEPA 2003.

Expenses exempt from tax

In order to qualify for exemption from tax the expenses have to be included within section 272 ITEPA 2003 and satisfy a number of conditions. For periods prior to 6 April 2003 the expenses had to have been ‘eligible expenses’ within the meaning of Schedule 11A ICTA 1988 and satisfy the same conditions. The conditions are:

  • the employee must change their sole or main residence as a result of starting a new job, changing the duties of the existing job or changing the place where the duties are performed. They do not have to actually dispose of the old residence. (See EIM03104.
  • the new residence must be within reasonable daily travelling distance of the new normal place of work and the old residence must not be within reasonable daily travelling distance of the new normal place of work. (See EIM03104)
  • the expenses must be incurred before the end of the year of assessment following the one in which the employee starts the new job.

From April 2003, if a removal expense satisfies the above conditions then, subject to a limiting amount (see below) it is exempt from tax.

Prior to 6 April 2003 if the removal expense was an eligible expense and it satisfied the above conditions it was considered a qualifying expense and was exempt from tax, providing the limiting amount was not exceeded (see below).

Expenses exempt from NICs

The first two conditions identified above apply equally to the exclusion from NICs in respect of relocation allowances. The relevant legislation is currently comprised in paragraphs 2(3) - 2(5) of Part VIII of Schedule 3 to the Social Security (Contributions)Regulations 2001.

However, when Class 1 NICs were aligned with the tax provisions, the time limit reflected in the third qualifying condition listed above was not introduced into the NICs exclusion. This is now reflected in paragraph 2(7) of Part VIII of Schedule 3.

The position for NICs is therefore that a payment can be excluded from earnings regardless of when the payment is made as long as it satisfies the first two tax conditions set out above. This means that Class 1 NICs will not be payable on a payment which :

  • is exempt from tax under section 271 ITEPA 2003 or, prior to 6 April 2003, was a qualifying expense for the purposes of Schedule 11A ICTA 1988); or
  • would be exempt from tax but for the fact that it does not satisfy the time limit for payment as set out in section 272(1)(b) or (3)(b) and section 274 ITEPA 2003; or, prior to 6 April 2003, was an eligible expense for the purposes of Schedule 11A and would have been a qualifying expense for the purposes of tax, except for the fact that it did not satisfy the time limit for payment.

Expenses which are not included within the tax exemption

Any relocation expenses which are paid but which are not identified in section 272 ITEPA 2003 (or, prior 6 April 2003, were not identified as eligible expenses within Schedule 11A ICTA 1988) must be included in the calculation of earnings for NICs purposes in the normal way. See NIM06150 for a list of some of the more common items which would not be capable of satisfying the tax exemption.

The qualifying limit for tax purposes (the £8,000 cap)

For tax purposes section 287 ITEPA 2003 (previously Schedule 11A ICTA 1988) imposes a limit on the tax exemption. This limit effectively caps the exemption which can be allowed for tax in respect of the value of the expenses and benefits incurred in relation to a particular relocation. The current limit is set at £8,000. Where an employee receives a relocation package where the value of the expenses and benefits exceeds £8,000 only the first £8,000 is actually exempt from tax.

When NICs were aligned with the tax treatment from 6 April 1998, the monetary limit which operates in respect of the tax exemption was not introduced for the purposes of NICs.

This limit therefore does not feature in the legislation for Class 1 NICs and paragraph 2(7) of Part VIII of Schedule 3 to the Social Security (Contributions) Regulations 2001 specifically directs that for the purposes of Class 1 NICs section 287 of ITEPA 2003 is ignored. Prior to 6 April 2003 paragraph 2(7) of Part VIII required that Schedule 11A ICTA 1988 was to be read as if paragraph 24 (the qualifying limit provision for tax) was omitted.

Although the £8,000 limit does not operate for Class 1 NICs purposes it is relevant to Class 1A NICs from 6 April 2000. From that date, where an employee receives relocation expenses and benefits which are in excess of the £8,000 limit they will generally be liable for Class 1A NICs. See NIM16251 for further information regarding Class 1A liability.