This Clause provides for tax relief for the new employers’ Class 1B National Insurance (NI) contributions introduced from 6 April 1999 to replace Class 1 and 1A NI contributions in PAYE Settlement Agreement situations. Employers can already claim a deduction when calculating business profits for their Class 1 and 1A NI contributions. From 6 April 1999 employers will be also be able to claim a deduction for Class 1B contributions.

These are legitimate business expenses incurred by an employer, no less than other tax deductible expenses incurred by businesses, and tax relief is to be available just as it is for employers’ Class 1 and 1A NI contributions.

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Subsection 1 provides that Class 1B NI contributions be added to the list in Section 617(4) ICTA 1988 of NI contributions paid by employers which are allowable as a deduction for tax purposes in certain circumstances. The most common situation is as a tax deduction when calculating business profits. (In rare instances where NI contributions are paid by office holders and ministers of religion who in turn engage assistance in their work, this ‘work’ expense is also an allowable tax deduction.)

Subsection 2 provides that the new relief has effect for Class 1B contributions paid on or after 6 April 1999.

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Class I NI contributions are earnings-related contributions payable by employers in respect of employed earners (who pay the primary contribution). Class 1A NI contributions are also made separately by employers who provide cars for private use to directors and to employees earning £8,500 or more a year. Employees do not make primary contributions in respect of such car benefits.

Under Section 617(4) ICTA 1988 an employer’s share of the Class 1 contribution, and their Class 1A contribution paid in respect of their employees, is allowed as a deduction when calculating the employer’s business profits for tax purposes.

PAYE Settlement Agreements (PSAs) help simplify the collection of tax on generally minor benefits in kind. They are voluntary agreements which enable employers to settle in a single payment the income tax liability on minor benefits in kind and expenses payments given to the employees. The tax paid by the employer is "grossed up" because paying tax on behalf of an employee itself gives rise to a taxable benefit. PSAs commenced for tax on 6 April 1996 replacing earlier informal arrangements.

PSAs are not a general alternative to the PAYE regime, but in situations where the benefit in kind/expenses are irregular or small, or there are practical difficulties in applying PAYE or apportioning benefits, an agreement offers the flexibility to

save employers the need to make end of year return payments to the Revenue,

save employees the need to include payments in their tax returns, and

save the Revenue the need to process these returns.

Although PSAs were introduced from April 1996 for tax, parallel arrangements for NICs are not in place until 6 April 1999. The Department of Social Security has now introduced a new category of NIC - Class 1B - which from 6 April 1999 will apply in a PSA. Class 1B will replace the Class 1/1A NICs which would otherwise be due. The rate of Class 1B will be 12.2% - the same rate as Class 1/1A.