NICs on deferred cash remuneration paid to internationally mobile employees

We provide an outline of the new guidance that HMRC is intending to publish on the application of National Insurance Contributions (NICs) on deferred cash remuneration paid to internationally mobile employees and the impact that this could have for employers. 

Where an internationally mobile employee receives deferred cash compensation, such as a bonus and has only been within the scope of National Insurance for part of the underlying period in which the deferred compensation was earned, the NICs treatment of such a payment has historically been a grey area with little guidance from HMRC. This has led to a range of approaches being applied by employers.

HMRC’s historic approach has been to not collect NICs when employees are outside of the scope of NICs at the point of payment, leading many employers to apply an ‘all or nothing’ attitude. Under this approach, if the employee is within the scope of NICs at the point of payment, the entire cash compensation payment is subject to NICs. Conversely, where the employee is not within the scope of NICs at the point of payment, the entire cash compensation payment is not subject to NICs. 

It is worth noting that this is at odds with the income tax position whereby the portion of the bonus payment relating to the period of work in the UK would remain taxable in the UK, even if it is paid outside of the UK when the employee is not UK tax resident. 

An alternative approach that is often taken by employers is ‘apportionment’. Here the tax and NIC treatment is aligned so that NICs are applied based on where the employee is socially insured during the underlying earnings period that the deferred cash compensation payment relates to. Applying this alternative approach would mean that the portion of the bonus payment relating to the period of UK work would be subject to both UK tax and also NICs, a very different result to the ‘all of nothing’ approach.

The NICs treatment of deferred compensation is a topic that we at S&W, and the wider tax profession, have sought clarity on for many years. Indeed, through HMRC’s Joint Forum on Expatriate Tax and National Insurance contributions, this has been a topic of much debate since 2008 when HMRC first confirmed it was considering the position and would be providing guidance in due course. Since that date, HMRC has completed many employer duty compliance reviews and has accepted both approaches, whilst its legal and policy teams have been considering the position.

In the last month, HMRC has indicated that it intends to publish formal guidance which ‘clarifies’ its view on this area and have shared the draft guidance with us at S&W, and other interested parties, for feedback.

Whilst the clarity is welcome news, the draft guidance as shared indicates that HMRC will be adopting and enforcing an ‘apportionment’ approach in all cases going forward.  

Of particular note, HMRC has indicated that it does not see this as a change in practice. Whilst HMRC will not reopen previously closed and settled enquiry/disclosure cases that were settled on an 'incorrect' basis, it may seek to open enquiry cases and seek to collect NICs for earlier years where the current guidance has not been followed.

The draft guidance, if formalised, represents both opportunities and also challenges for employers:

Historical exposure

Whilst the new guidance may mean potential exposure for companies where they have historical underpayments of NICs, HMRC has indicated employers who have overpaid NICs will be able to make repayment claims. 

Interaction with Social Security Certificates/Exemptions:

For internationally mobile employees who are seconded into or outside of the UK, individuals may have a Certificate of Coverage (CoC) or Form A1. This means they are subject to NICs for a defined period whilst on secondment overseas, or exempt from UK NICs for a defined period whilst on secondment in the UK. 

Alternatively, they may be subject to the 52 week NIC exemption (for inbound employees) or a 52 week liability (for outbounds) moving between the UK and a non-agreement country. 

On the face of it, HMRC’s apportionment approach is helpful, since it means an earnings period/ apportionment approach applies to both tax and NICs. HMRC has clarified that this same approach also needs to consider CoCs, A1s and 52 week exemptions/ liabilities. This means that there will still be a disconnect between amounts subject to tax and NICs, which will create significant practical challenges for employers.

For example, if an individual were on secondment to the UK from Australia from July 2024, they would be subject to a 52 week exemption from NICs from July 2024 through to the end of June 2025. If the individual were to receive an annual (calendar year) 2025 bonus and this is paid in March 2026, whilst the full amount would be subject to income tax, only 50% of the bonus would be subject to NICs. 

Similarly, in the reverse scenario an outbound assignee from the UK to Australia but with all other facts the same, there would be a NIC liability on 50% of the bonus paid after the individual’s 52 week liability has ended. It’s worth noting that the same principle would apply to deferred cash payments ‘earned’ while an individual was covered under a Certificate of Coverage or Form A1 but paid at a later date.

Potential double social security liabilities

HMRC has acknowledged that the new guidance could give rise to potential double social security liabilities where the UK and the overseas country both seek to subject the same portion of the deferred cash compensation payment to social security.

Where the UK has a reciprocal social security agreement in place with the overseas country concerned, the social security agreement should act to prevent a dual liability, although how easy this will be to apply in practice is to be seen.

As an example, under the social security agreement between the UK and the US, there is a mechanism for the UK and US social security authorities to resolve any disagreements such as where dual liability is due, but the agreement only indicates that the competent authorities will endeavour to settle the issue, which means that they are not obligated to reach a resolution that avoids double social security liabilities on the same income. Further, the actual process for the competent authorities to engage and reach a resolution will likely be lengthy and drawn out which will increase costs and uncertainty for employers.

It’s also worth noting that the UK’s network of social security agreements is much smaller compared to its network of double taxation agreements, and so this leaves the question of what will happen where there is no social security agreement in place with the overseas country concerned.

Go-forward process

Payroll processes going forward will need to be reviewed to ensure that the position as set out above by HMRC is followed for current and future years once the draft guidance is formalised. 

We will continue to work closely with HMRC on the draft guidance and will provide further updates as this matter progresses. In the interim however, we can support your business as follows:

• We can review your historical reporting to determine whether there may have been an under or overpayment as well as the extent of any potential exposure under the proposed new guidance. The groups of employees to focus on would be any employees who have relocated into and out of the UK on either a permanent transfer or secondment basis. Note, this exercise is recommended even where employers already apply an apportionment basis to capture any misalignment between the tax and NIC position for secondees under a CoC/A1 or 52 week exemption/liability
• We can support with the design and implementation of a new payroll process for reporting any cash based deferred compensation going forwards
• We can support with business risk reviews with HMRC
• We can support with managing any complexities around your international mobile employee population

If you would like to discuss how any of the above could impact your business, please do get in touch with your usual S&W contact or the contacts listed

Approval code: NTEH7062522