HMRC have updated their National Insurance Manual (NIM) to clarify when National Insurance Contributions (NICs) are assessed and reported to HMRC. This is where the expense is subject to Class 1 Contributions that can only be collected via the payroll.
There are many instances where expenses are reimbursed that have both an Income Tax and Class 1 NICs liability, for example, personal liabilities such as personal telephone bill / broadband expenses. In these situations it is important to recognise that these expenses are classed as earnings and:
- Income Tax can be collected via the payroll or they can be reported on the P11D; but
- Class 1 NICs can only be collected via the payroll as there is both an employee and employer liability
The NIM now reads:
For Class 1 NICs, liability arises at the time the expenses are incurred, and the Class 1 NICs liability is assessed and payable when the expenses are actually paid"
This is a welcome clarification and aligns with the overriding NICs legislation which says that NICs are calculated in the payroll at the time earnings are paid.
For Bookkeepers
Recognising the liability for Class 1 NICs as opposed to Class 1A NICs is an important consideration. Also:
- If the employer pays expenses through normal payroll system, if the expense payment code is set-up correctly, Class 1 NICs will be collected automatically. Usually, this will result in an Income Tax collection as well, thereby avoiding the P11D liability; but
- If the employer pays expenses outside the payroll system, say through a petty cash system, it is important that the value is obtained and added to other earnings subject to Class 1 NICs. This will be via a notional pay element that does not actually pay monies but does add to any other payments subject to Class 1 NICs
Of course, come the mandation of payrolling taxable expenses and benefits from April 2027, it will be a complicated option for employers to pay expenses outside of the payroll system. Both the Income Tax and Class 1 NICs must be accounted for in the period that the payroll is processed. Or the expenses can be reimbursed outside the payroll and both the Income Tax and Class 1 NICs collected via the payroll meaning that a notional item will need to be created to ensure they are not paid again.
Another consideration for employers because of the upcoming mandation of payrolling in 2027.
