NIM06130 - Class 1 NICs: Expenses and allowances: Relocation allowances: Special provision for 1998/99 where relocation expenses included in a PAYE Settlement Agreement (PSA)

Regulation 19(1)(zc)(iii) of the Social Security (Contributions) Regulations 1979

Background

Many employers account for tax on relocation packages through a PAYE Settlement Agreement (PSA). This allows them to account for the tax in a lump sum after the end of the tax year and avoids them having to enter into detailed administrative arrangements to report the individual sums involved.

PSAs were introduced in April 1996 but legislation to align the NICs treatment of items put through a PSA was not introduced until 6 April 1999. It was not possible to introduce the legislation earlier as it needed primary legislation. Before the necessary NICs legislation could be introduced an employer was required, for NICs purposes, to identify the precise amounts payable to individual employees and to account for these through the payroll at the time of payment. This was very onerous compared to the PSA arrangements.

When the legislation was introduced to align the treatment of relocation expenses from 6 April 1998 it was known that the NICs treatment of items included in a PSA for tax was to be aligned with the tax treatment from 6 April 1999. It was therefore felt to be unreasonable to expect employers to set arrangements in place just for the 1998/99 year to account for the NICs on the taxable allowances. The arrangements would be needed only for the 1998/99 year because from April 1999 the employer would be able to pay a global amount of NICs in respect of all taxable expenses after the end of the tax year in similar manner to the tax on the PSA.

Special exclusion for relocation expenses included in a PSA

An additional provision was accordingly introduced to exclude from Class 1 NICs any taxable expenses included in a PSA for the 1998/99 year.

The original provision was included in regulation 19(1)(zc)(iii) of the Social Security (Contributions) Regulations 1979.

Although many taxable expenses will satisfy the criteria for inclusion in a PSA because they will be minor, irregular or are such that it would be impracticable for an employer to identify them and put them through the payroll, some allowances will not meet these criteria. See NIM18000 for general information about PSAs and NICs.

Additional housing cost allowances (AHCA) or mortgage subsidies – usually paid to employees who move to a more expensive location – are usually paid over a substantial period of time, regularly and together with other pay. They will not generally satisfy the criteria for inclusion in a PSA and were not, therefore, excluded from NICs by virtue of the special provision introduced for 1998/99. Nor are they be capable of being excluded from NICs from 6 April 1998 under the relocation alignment provision since they are taxable expenses.

You may encounter instances where AHCA payments are genuinely irregular in nature and are deemed to be suitable for inclusion in a PSA. If you are in any doubt about whether or not an allowance should be in a PSA make enquiries to find out why the payment has been included so that a consistent approach is adopted for both tax and NICs.