NIM06160 - Class 1 NICs: Expenses and allowances: Round sum allowances
The payment of a round sum allowance to an employee is earnings for the purposes of NICs and is liable for the payment of Class 1 NICs because it is a payment which is made to or for the benefit of the employee.
See NIM02010 for guidance on section 3(1) of the Social Security Contributions and Benefits Act 1992 and the meaning of earnings, and NIM02015 regarding section 6(1) of that Act concerning liability for NICs.
Reimbursement of actual business expenses is excluded from Class 1 NICs liability under the provisions of regulation 25 and paragraph 9 of Part 8 of Schedule 3 to the Social Security (Contributions) Regulations 2001 (SI 2001 No 1004). These provide that
“For the avoidance of doubt, there shall be disregarded any specific and distinct payment of, or contribution towards, expenses which an employed earner actually incurs in carrying out his employment.”
See NIM05020 for general guidance regarding business expenses.
A round sum allowance bears no particular relationship to the expenses which an employee will incur or has incurred, and is paid irrespective of whether or not the employee spends the allowance or spends it to cover actual costs. A round sum allowance must therefore be distinguished from a reimbursement of expenses which are actually incurred by an employee.
Although business expenses which are actually incurred can be excluded from NICs a round sum allowance, which does not identify the business expenses, cannot be excluded as it does not satisfy the requirements of paragraph 9 of Part 8 of Schedule 3 that it must be a “specific and distinct payment” of expenses actually incurred.
If, however, an employer can identify the actual expenses within a round sum allowance which have been incurred then these can be excluded and NICs will be due only on any profit element.
From 6 April 2016, paragraph 9 of Part VIII to Schedule 3 of the Social Security (Contributions) Regulations 2001 was amended such that payment or reimbursement of business expenses cannot be disregarded from the calculation of an employed earner’s earnings if paid using a salary sacrifice arrangement, an unapproved scale rate, or by round sum allowance. The payment of an unapproved scale rate (i.e. not approved under section 289B of ITEPA or regulation made under section 289A (6) of ITEPA) is also now considered to be a round sum allowance and therefore earnings for Class 1 NICs purposes (see NIM05015).
See also NIM05680 and NIM06170 for guidance where an employer bases expenses on an estimate of likely costs or uses scale rate payments.