If National Insurance is Payable on Salary, why Can’t I Pay My Employees in Gold or Jewels? - Ad Valorem

On the turn of the new millennium NMB Holdings Ltd made the decision to pay its directors bonuses in platinum sponge. Platinum sponge is a material which is used in the catalysts for diesel vehicles.

Many readers may ask the question, what would a director of a company want with a material like platinum sponge? It turns out that Platinum Sponge had a secondary use – avoiding paying National Insurance.

What is National Insurance Charged on?

Class 1 National Insurance is an integral part of the UK’s tax system. It is designed to help fund state benefits such as the state pension.  paid on ‘earnings’ this includes any cash payments such as salaries and bonuses. Class 1 National Insurance is charged at 8%/2% on the employee and 13.8% on the employer.

This increased cost has led to some companies exploring alternative methods to remunerate their employees.

Class 1 National Insurance is payable on cash and cash equivalents. For example, should the employer pay the employee in premium bonds, this will also be subject to Class 1 National Insurance on both the employee and employer as the premium bonds can be exchanged for cash very easily.

Class 1 National Insurance is not payable on the transfer of one of the employee’s assets to the employee, for instance a TV. This is because, while the TV could be sold on, the asset cannot be immediately surrendered for a cash payment. Where an employer transfers an asset rather than making a cash payment, Class 1A National Insurance will be payable by the employer at 13.8%.

However, there is still a significant tax saving of 8%/2% for the employee.

So, if an employer was to transfer an asset, for example a gold bar, would that save National Insurance for the employee? And, if so, why don’t more employers do this to save their employees money?

National Insurance on Gold and Jewels

The question of paying an employee in high value assets reached a head back in 2000 and gave birth to a new set of anti-avoidance legislation known as the readily convertible assets regime as a response.

In the case of NMB Holdings, the company purchased large amounts of Platinum sponge which they paid to their directors as a bonus. The company also arranged for a buyer to purchase the platinum sponge off of the directors following the payment of the bonus, effectively transferring an asset to the directors (which is only subject to Class 1A National Insurance) and then allowing the directors to immediately sell their sponge for a cash payment. NMB Holdings lost the case and new legislation was drawn up to prevent other companies from creating similar arrangements.

The readily convertible assets legislation applies wherever an employer transfers an asset which can be traded on a recognised stock, or commodities exchange. Or where trading arrangements exist such as where the employer arranges for a buyer to purchase the assets off of the employee. As a result, most valuable materials, such as gold and silver, are deemed to be earnings for National Insurance purposes.

More commonly, the regime applies where employers issue shares or share options to an employee prior to a sale of the business, or where the shares are issued in a subsidiary company.

How Can Ad Valorem Help?

In conclusion, while creative compensation strategies may seem appealing to reduce tax liabilities, businesses must navigate complex legal frameworks and potential pitfalls. Ensuring compliance with current HMRC guidelines is essential to avoid costly penalties and legal issues.

Our tax specialists are happy to discuss any queries you may have regarding National Insurance, remuneration packages or employee retention, such as through the use of trivial benefit or share schemes.

Please do hesitate to get in touch at enquiries@advaloremgroup.uk if you would like to know more about the services we provide.