NIM13302 - Class 1A NICs: liability for Class 1A NICs: Class 1A NICs on sporting testimonials: introduction

Income received indirectly from an employer is typically subject to tax and NICs as earnings from that employment. Historically HMRC did not treat the proceeds from non-contractual and non-customary sporting testimonials, organised by a third party (such as a testimonial committee) as earnings for tax and NICs purposes. We used an extra statutory concession based on longstanding case law (Reed V Seymour case from 1927) which found testimonials were organised to demonstrate affection and regards for the personal qualities of the sportsperson and were not earnings. However, that case law was superseded by changes to tax law, such as the benefits code and disguised remuneration. This created an income tax and NICs charge on benefits in kind and payments of earnings from third parties.

The extra statutory concession was therefore no longer tenable, as there was no legal basis for exempting these payments. Therefore, as part of the 2015 Autumn Statement, the government announced that it would be reforming the income tax and National Insurance treatment of payments derived from sporting testimonials. The changes can be summarised as follows:

  • bringing payments from sporting testimonials that are non-contractual, non-customary and organised by an independent testimonial committee within the scope of both income tax and NICs
  • introducing a new £100,000 income tax exemption and an equivalent NICs threshold for these types of sporting testimonial payments
  • ensuring the new £100,000 NICs threshold and tax exemption will apply to only one testimonial in the sportsperson’s lifetime, which could come from one event, or a series of events held over a 12 calendar month ‘testimonial year’ - if any of the £100,000 threshold is unused it can’t be applied against another, future, testimonial.

The relevant income tax changes came into force from April 2017 following legislation in Finance Act 2016. This brought an end to the extra statutory concession and confirmed that whilst income from non-contractual, non-customary sporting testimonials would become taxable, there would be a generous £100,000 exemption to ensure that this change had a limited impact on the sportspersons.

The rules governing the NICs treatment of sporting testimonial payments were also changed to give clarity to the NICs treatment to closely align it with the April 2017 changes to the income tax treatment that Parliament approved.

Section 3 of the National Insurance Contributions (Termination Awards and Sporting Testimonials) Act 2019 introduced a NICs charge on sporting testimonials (section 4 introduces the equivalent charge for Northern Ireland).

Where the sportsperson’s employer arranges the testimonial, or if it is part of their employment contract, or there was an expectation that the sportsperson would be entitled to one, then the testimonial is already subject to income tax and Class 1 NICs in full.

As of April 2020, non-contractual and non-customary testimonials arranged by third party (such as a testimonial committee) are now subject to an employers Class 1A NICs liability, if above a £100,000 threshold. The third party testimonial committee will be liable to pay that Class 1A NICs liability on any amount of a testimonial payment above this threshold. These types of testimonials will not be subject to employee Class 1 NICs to ensure the sportsperson is not adversely affected. HMRC expected that the majority of sporting testimonials would be unaffected by these provisions, as in most cases, the amount raised for the sportsperson will not exceed the £100,000 threshold

In cases involving a non contractual or non customary sporting testimonial it is the controller of the sporting testimonial is the person who is liable to pay any Class 1A NICs due in respect of the sporting testimonial payment(s), instead of the earner’s employer.

This treatment of non-contractual and non customary testimonials does nothing to affect the ability of the sportsperson to make tax and NICs free donations to their charitable foundations from their testimonial payment, provided such donations are organised and paid by an independent testimonial committee via the payroll giving provisions.

See NIM01600 for guidance about the rate of Class 1A NICs when the tax year is 2022 to 2023.