In March 2018 we reported changes to the tax and National Insurance Contributions (NIC) treatment of termination payments highlighting that, despite the rule changes being less than a month away, HMRC had still not issued updated guidance.
On 6 April 2018, the day on which a number of the rule changes became effective, HMRC finally updated its guidance to take account of the new rules. This is welcome news given the complexity of some of the rule changes. As a reminder, the changes which became effective from 6 April 2018 are as follows.
- The concept of post-employment notice pay (“PENP”) is introduced.
- Foreign service relief (except in relation to seafarers) is abolished for employees who are UK tax residents in the tax year their employment terminates.
- Payments for injury to feelings (except in limited circumstances) are no longer fully exempt from tax and NIC.
- The Treasury is now able to vary the £30,000 threshold by regulations subject to House of Commons approval.
In relation to the introduction of PENP, we now have a system where termination payments and benefits which meet certain criteria are treated as ‘relevant termination awards’ and are split into the following two elements.
- PENP - essentially payments in lieu of notice calculated by reference to a specific PENP formula which will no longer qualify for the £30,000 tax-free threshold, and are chargeable to tax and Class 1 NIC as earnings under PAYE.
- Other termination awards which qualify for the £30,000 tax-free threshold - these termination awards are calculated by subtracting the amount of PENP (if any) from the total amount of all relevant termination awards received.
Notably, the HMRC guidance on PENP confirms that employers are required to calculate the amount of PENP using the PENP formula whether or not the employee or former employee receives a contractual or non-contractual payment in lieu of notice.
Employers should not lose sight of the fact that further changes to the tax and NIC treatment are on the horizon. From 6 April 2020 it is intended that all qualifying termination payments above the £30,000 (unless it is varied) threshold will be subject to employer’s Class 1A NIC in addition to tax. It is anticipated that this will be unlike Class 1A NIC on employer-provided benefits in kind as it will be accounted for and paid through the PAYE system.
If you have not already done so, we recommend that you read and consider the advice in our ‘Termination payments rules are changing – what does this mean for HR?' and ‘Payroll and the changes to termination payments – is your team prepared?’ articles which were published in March 2018.