NIM13147 - Class 1A National Insurance contributions: Liability for Class 1A NICs: Calculating the cash equivalent of a benefit: Example

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

NIM13146 explains that Class 1A NICs are calculated by reference to the cash equivalent of a benefit determined for income tax purposes. If the employer calculates the cash equivalent incorrectly and returns this amount on form P11D, this may result in an underpayment of Class 1A NICs if this is the figure the employer uses to calculate Class 1A NICs liability. The example below shows two ways that an employer might calculate and record the cash equivalent of a benefit on form P11D and the possible consequences for Class 1A NICs.

Example

A director has exclusive use of his company’s helicopter.

The director uses the helicopter for both private and business journeys throughout the 2020 to 2021 tax year.

50% of journeys are private journeys and 50% business journeys.

In the table below the cost of the benefit is calculated by reference to 20% of the market value of the asset plus the running and maintenance costs for the year (see section 205 ITEPA 2003 and EIM21630).

The table shows two ways that an employer might calculate the cash equivalent of the benefit derived from the use of the helicopter. Section 204 of ITEPA does not allow the business use to be taken into account when calculating the cash equivalent. Therefore, the method shown in the right hand column is correct. Where employers use the method in the left hand column it will result in a Class 1A NICs underpayment.

Type	Cash equivalent of benefit less business proportion – incorrect	Cash equivalent including business proportion – correct
Cost of benefit (20% of £125,000)	25000	25000
Business proportion	12500	Not appropriate
Made good	Nil	Nil
Cash equivalent – P11D figure	12500	25000
Employee’s deduction (section 365 ITEPA 2003 –see EIM31617)	Nil	12500
Taxable benefit	12500	12500
Class 1A benefit	12500	25000