When an employee leaves a company, they often agree to a settlement agreement that outlines the terms of their departure. One question that may come up is whether or not National Insurance Contributions (NICs) need to be paid on the payments made in the settlement agreement.

The short answer is that it depends on the nature of the payment. If the payment is considered earnings for the employee, then NICs will need to be paid. However, if the payment is a non-taxable payment, NICs will not need to be paid.

Here are some common types of payments that may be included in a settlement agreement and how they are taxed for National Insurance purposes:

1. Salary or bonus payments – If the settlement agreement includes salary or bonus payments that are due to the employee, then NICs will need to be paid.

2. Pay in lieu of notice – If the employee is entitled to receive pay in lieu of notice, then NICs will need to be paid.

3. Redundancy payments – The first £30,000 of a redundancy payment is tax-free and also free from NICs. Anything over £30,000 will be taxable and NICs will need to be paid.

4. Compensation payments – If the settlement agreement includes a compensation payment for things like unfair dismissal or discrimination, then NICs will not need to be paid.

It`s important to note that the employer is responsible for deducting and paying NICs on behalf of the employee. If you are unsure about whether or not NICs need to be paid on a settlement agreement, it`s best to consult with a tax professional or employment lawyer.

In summary, whether or not National Insurance Contributions need to be paid on a settlement agreement depends on the nature of the payment. If it is considered earnings for the employee, then NICs will need to be paid. If it is a non-taxable payment, NICs will not need to be paid. It`s important to understand the tax implications of settlement agreements to ensure compliance with HMRC regulations.