The tax and National Insurance contributions (NIC) treatment of termination payments has always been an area which employers have struggled to deal with correctly, and over recent years HMRC has looked to simplify the rules. Following a consultation, the drafting of legislation, and the belated issuing of HMRC guidance, the rules changed on 6 April 2018. From that date:
- post-employment notice pay (‘PENP’) is introduced;
- foreign service relief is largely abolished for employees who are UK tax resident in the tax year their employment ends;
- injury to feelings payments fall outside of the full exemption for disability payments, except in limited circumstances; and
- subject to House of Commons approval, the Treasury can vary the £30,000 threshold by regulations.
The introduction of PENP is attracting the most attention, as this changes how payments in lieu of notice (PILONs) are treated. Previously the tax and treatment of a PILON depended on whether it was contractual, customary, or paid automatically, which required scrutiny of the employee’s contract and the employer’s practices. From 6 April 2018, all PILONs will be treated equally as employers will need to identify the part of the total termination award which represents basic pay for unworked notice (the PENP) and subject this to tax and employee’s and employer’s NIC under PAYE.
While this sounds reasonable and simple, the problem is that a complicated legislative formula, requiring significant information about the employee, must be applied to calculate the PENP. This is the case even where the employee receives a contractual PILON.
Broadly, if the employment ends on or after 6 April 2018 the new rules apply. An employee whose employment ceased on or before 5 April 2018 without notice could potentially receive a non-contractual PILON tax and NIC free, but the same payment to the same employee will be taxable and liable to NIC if the employment ceased on or after 6 April 2018. Businesses which have recently announced job-cuts such as Nissan and Lloyds Banking Group will need to consider whether the new rules apply.
Further changes are also on the horizon. From 6 April 2019 all termination payments above £30,000 will be subject to employer’s Class 1A NIC in addition to tax, further increasing the NIC costs for employers paying larger termination payments. Employers will have three different sets of rules to apply across three consecutive tax years, increasing the risk of mistakes.
HMRC had a real opportunity to simplify the rules for employers but has potentially made matters more complex.
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