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National Insurance Contributions and Statutory Payments Act 2004

Agreements and joint elections - employment-related securities

14.Section 3 (Great Britain) and section 4 (Northern Ireland) amend Schedule 1 to the Social Security Contributions and Benefits Act 1992 (CBA 1992) and Schedule 1 to the Social Security Contributions and Benefits (Northern Ireland) Act 1992 (CB(NI)A 1992) to widen the scope of joint National Insurance contributions elections and agreements.

Current position

15.Currently, employers can ask their employees to fund the employer’s contribution liability arising when an employee exercises an employment-related option to acquire securities, either through a “joint National Insurance contributions election” or a “joint National Insurance contributions agreement”. Using a National Insurance contributions election legally transfers the secondary liability to the employee. It thus removes the need for the employer to provide for the unpredictable secondary liability for contributions in their accounts, when the amount of the employer’s contribution liability is contingent on the gain from options on exercise. Under a National Insurance contributions agreement, the liability remains that of the employer and must, therefore, be reflected in the company’s accounts. The employee simply reimburses the cost of the liability to the employer.

Effect of the measure

16.Employers who award restricted and convertible securities also face a similar problem in respect of accounting for the unpredictable “post-acquisition” secondary contribution liability on these awards. The term “post-acquisition” relates to a chargeable event following the employee taking ownership of restricted or convertible securities. Typically, a charge to income tax and National Insurance contributions will occur when a restriction applying to the security is lifted or the security is converted into another more valuable form of security. For example, where an employee is awarded shares without any voting or dividend rights for the first two years following the award, the restriction will reduce the value of the shares. When the restriction is lifted at the end of the two year period the shares will increase in value with the benefit of the voting and benefit rights returned. The changes at sections 3 and 4 will allow an employer to ask the employee to fund the employer’s (secondary) National Insurance contributions liability on post-acquisition earnings derived from restricted and convertible securities.

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