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Stay in good NIC

National Insurance is not, I believe, the number-one planning area for

most financial advisers, tied or independent. A little reflection,

however, leads one to appreciate how relevant it is in so many areas of

financial planning that are (or should be) areas of core competence for

advisers.

In pension planning, the legitimate avoidance of NICs that the payment of

a contribution to an approved scheme facilitates is well known.

Salary sacrifice (actual or prospective) done properly can also facilitate

NIC savings that can result in a cost-free enhancement of pension benefits

by the employer contributing the NIC saving to the scheme.

NIC avoidance was one of the main reasons for promoting “old style” funded

unapproved retirement benefits schemes. The resulting avoidance (or the

potential for it) was also the main reason for the legislation that

eventually brought most Furbs&#39 contributions within the NIC net.

NIC avoidance was also a strong motivator for schemes involving gilts,

unit trusts and life insurance, particularly offshore life insurance. All

these schemes gave rise to specific anti-avoidance legislation.

There is still some debate over the effectiveness of it, especially with

regard to the life insurance-based schemes.

In the most fundamental area of pension planning, that is, the decision as

to whether to take benefits from the company by dividend, salary or, in

deferred form, through a pension, NICs are an extremely influential factor

– an understatement if ever there was one.

Spousal employment and pensions for spouses is an area also substantially

driven by NIC considerations although it is admitted that tax also has a

pretty significant role to play.

So, perhaps my opening line was not so accurate after all, especially in a

world where (as I have said many times before) the financial adviser&#39s

“product” is the solution that he or she offers and where the financial

product is a means to an end.

In such a world, more than a passing understanding of how National

Insurance works and, perhaps even more important, how it can be

legitimat-ely minimised without damaging entitlement to benefits, will be

essential to anyone advising employers, directors or employees.

For those of you who agree with the principle of having a professional

interest in tax and National Insurance as a key part of your advice-giving

process, then there have been a few developments in the field (so to speak)

that you ought to be aware of.

The first has its roots in the fact that, since April 6, 1999, National

Insurance has been payable by both the employer and employee on the gains

arising when share options under unapproved schemes are exercised (or are

cancelled or assigned) and where the shares or the options are readily

convertible into cash.

Before then, National Insurance was payable when share options were

granted but only if the options were granted at a discount and any charge

was limited to the amount of this discount.

The rules were changed because the charge at the time of the grant

reflected neither the gain that the employee made when the option was

exercised nor the fact that the option might not be exercised. The old

rules were also deliberately used by some firms to pay big bonuses to

directors and top-paid employees free of National Insurance.

Whereas the employee&#39s earnings are subject to a cap (currently £27,820)

above which no NICs are payable by the employee, the earnings&#39 cap on

secondary NICs normally borne by the employer was removed in 1985 to offset

the cost of reducing the NIC burden for the lower paid. The secondary

contribution rate is currently 12.2 per cent.

Next week, I will go on to look at two Inland Revenue-approved share

option schemes under which gains arising from the exercise of options are

free of tax and National Insurance.

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