The National Insurance Contributions and Statutory Payments Act 2004

The National Insurance Contributions and Statutory Payments Act 2004 received Royal Assent on 13th May 2004. This Act amends the Social Security Contributions and Benefits Act 1992 and the Social Security Contributions and Benefits (Northern Ireland) Act 1992 and enables employers and employees to enter into joint agreements and elections relating to restricted and convertible shares or securities so that employees can pay their employer's national insurance contributions (NICs) which arise in relation to such shares. At present employers are only permitted to ask employees to bear the employer's NICs on gains realised on the exercise of securities options.

The provisions of the Act extending the joint NICs elections/agreements facility to restricted and convertible shares or securities are still not available for use. The operative date will be set by Treasury Order to be issued following Royal Assent of the Finance Act 2004 in July 2004.

Joint elections and agreements cannot be entered into until after this operative date. Such agreements and elections can apply to shares awarded both before and after the legislation takes effect but can only apply to NICs liabilities arising after the election or agreement has been entered into.

Employees who bear the employer's NICs liability relating to convertible shares and securities will obtain relief from income tax equal to the employer's secondary national insurance liability paid by them. An employer company's ability to obtain income tax relief on earnings from those shares as a result of employees paying the employer's NICs liability will not be affected by the employee getting income tax relief.

The extension of NICs agreements and elections to employment related securities do not apply to gains on shares or securities taxed under the anti avoidance provisions applying to shares acquired at an artificially depressed or enhanced market value.

In addition to the provisions relating to securities, the Act also introduces changes that aim to align some elements of the administration of NICs, statutory sick pay and statutory maternity pay with the administration of income tax.

If you would like to discuss the draft legislation or have any other queries relating to securities and/or securities options please contact Kate Kelleher, Share Incentives Partner in London [email protected]; telephone: 020 7367 2860).