Changes to employer's NIC elections on Share Incentives

What is the issue?

Share Incentive arrangements may, depending upon how they are structured, give rise to a charge to employer’s National Insurance Contributions (“NIC”) on the vesting/exercise of the awards.

Due to the potentially sizeable value of the employer’s NIC (currently 12.8% of the taxable income) HMRC allows for the transfer of employer’s NIC onto employees.  This helps to significantly reduce the cost to the employer of certain forms of employee share incentives.

One of the ways in which this can be done is a joint NIC Election between the employee and the employer. In order to be effective it must be approved by HMRC.

Such elections are important in that they transfer the primary obligation onto the employees. This also means that the employing company need not account for the employer’s NIC liability in its accounts. 

What has changed?

HMRC guidelines issued on 10 November 2008 provide further guidance on the terms required in the NIC Elections and also limit the circumstances in which HMRC will give their approval. 

What action is needed?

Companies should review the terms of their NIC Elections to confirm that will meet the requirements for approval from HMRC.  It should be noted that existing NIC Elections are unaffected by the change but any NIC Elections entered into on or after 1 December 2008 will need to ensure compliance in order to obtain HMRC approval.