NIM13132 - Class 1A National Insurance contributions: Liability for Class 1A NICs: Benefits provided on termination of employment (for tax years up to 5 April 2020)

Section 10 of the Social Security Contributions and Benefits Act 1992 (SSCBA 1992)

This page only applies to tax years up to 5 April 2020 for termination awards made from 6 April 2020 see NIM 13200

Introduction

For a Class 1A NICs liability to arise an earner must be chargeable to income tax under Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003) on an amount of general earnings received by them. The relevant legislation is section 10(1) of the SSCBA 1992 – see NIM13070.

Statutory Redundancy payments

Section 309 ITEPA 2003 places statutory redundancy payments, which are due to employees under the Employment Rights Act 1996, solely within Chapter 3 of Part 6 of ITEPA 2003 (sections 401 to 416) see EIM13000. They are not taxable as general earnings.

Redundancy payments - general

Section 403 of ITEPA 2003 describes an amount chargeable to tax under that section as employment income. As payments and benefits charged to tax under section 403 are neither general earnings, or treated as such, a Class 1A NICs liability cannot arise. Section 10(1)(a) of the SSCBA 1992 is not satisfied.

Non-statutory redundancy payments

Non-statutory redundancy payments, may arise where employers pay more than the statutory limits but for the same reason as statutory payments under the Employment Rights Act 1996. Those payments are also chargeable to tax solely by section 403 of ITEPA 2003.

Applying the £30,000 exemption

Payments within section 403 of ITEPA 2003 qualify for the £30,000 exemption and tax will only be charged on amounts in excess of the exemption. Regardless of the tax charge, no Class 1A NICs liability can arise from payments and benefits charged to tax under section 403 of ITEPA 2003.

Payments other than for redundancy

Chapter 3 of Part 6 of ITEPA 2003 includes only payments and benefits that are clearly compensation for loss of employment by reason of redundancy – as defined in the Employment Rights Act. Not included are other payments and benefits that may be provided at the same time but for different reasons, such as certain types of payments in lieu of notice.

Where other payments or benefits are provided on termination of employment, for Class 1A NICs liability to arise the conditions described at NIM13020 must apply. The payments/benefits must be, or must be treated as, general earnings and must not attract a Class 1 NICs liability.