NICs on termination awards and sporting testimonial payments announced
By Justine Riccomini, Head of Taxation (Scottish Taxes, Employment & ICAS Tax Community)
10 May 2019
The National Insurance Contributions (Termination Awards and Sporting Testimonials) Bill was introduced in the House of Commons on 25 April 2019.
The aim of the UK Government is to bring the NICs treatment of termination awards and sporting testimonials into closer alignment with the current income tax treatment as introduced in April 2018. A charge to Class 1A Employer NICs of 13.8% will be introduced from 6 April 2020 on income arising from the receipt of either a termination award (over £30,000) or sporting testimonial (over £100,000).
Background
The changes have been a long time in the making: they were first announced at Summer Budget 2015, consulted on over summer 2015, confirmed at Budget 2016 and the draft legislation was published in December 2016. The income tax treatment was legislated for in Finance Acts 2016 and (No.2) 2017. In the Budget 2018 announcement, it was confirmed that the measures relating to the corresponding NICs treatment of sporting testimonials and termination awards would take effect from 6 April 2020.
HMRC expects that only around a fifth of termination payments and a small number of testimonial payments will be caught by the new rules.
Termination awards
Any part of a termination payment which is liable to income tax will also be liable to a Class 1A NIC charge of 13.8%.
A “termination award” is, according to the HMRC fact sheet, “a payment received in connection with the termination of a person’s employment”. The HMRC fact sheet notes that the legislation will “affect any termination award that is paid voluntarily by the employer to the employee to cover the costs that finding a new job will incur”, but that “other types of termination award such as earnings, compensation payments or redundancy payments” are not affected.
Sporting Testimonials
Sporting testimonial payments are made when a club testimonial committee organises a sporting event which aims to honour a player for their service to the club upon retirement. Generally, the gate receipts and other ancillaries are paid to the player as a token of the fans’ esteem for their work for the club. Historically, this meant that the termination payment was a form of ex gratia payment separate from the player’s club earnings. If, however, the player has a contractual or customary right to receive a testimonial payment as part of his employment terms with the club, it is long established that this should form part of their earnings as derived from the employment under s.62 ITEPA 2003, and subject to income tax and Class 1 NICs in full.
However, from 6 April 2017 legislation was introduced to establish that non-contractual or non-customary sporting testimonials would be subject to income tax under s.306B ITEPA 2003, but only to the extent they exceed £100,000. Any part of a non-contractual or non-customary testimonial payment that exceeds this threshold is treated as taxable income and the testimonial committee must deduct income tax under PAYE.
Under the new legislative provisions from April 2020, a Class 1A Employer NICs charge of 13.8% will now also be charged on any part of a non-contractual or non-customary testimonial payment that exceeds the £100,000 threshold or falls outside of the testimonial year, to mirror the income tax provisions.
HMRC estimates that on average, 220 sporting testimonials are held annually and that only a small number of these will be likely to incur an NICs charge where this is in excess of the £100,000 exemption.
The responsibility to report the NICs and pay it over from 6 April 2020 will be that of the testimonial committee.
Further information can be found here.