Termination payments – the latest intelligence
By Justine Riccomini, Head of Taxation (Scottish Taxes, Employment and ICAS Tax Community)
19 February 2020
Justine Riccomini explains the most recent changes to termination payments legislation
In Budget 2018, the Government announced it would be changing the taxation of termination payments to tighten the scope and aligning the NICs regulations to ensure that employers NICs were payable on payments exceeding £30,000, mirroring the tax treatment.
The intention was to bring in legislation in April 2018 which required employers to report the Class 1A NICs when they arose (i.e. in Real Time Information returns) rather than after the end of the tax year.
However, this was deferred until 2020. Draft regulations which will become operational from 6 April 2020 will now require employers to account for Class 1A NICs on payments in respect of terminations and sporting testimonials.
In addition to this, employers should already be aware that HMRC announced alternative post-employment notice pay (PENP) calculations for employees who are usually paid their salary in equal monthly instalments but where the contractual notice period is expressed in days or weeks (e.g. “you must give us 7 days’ notice” or “notice of termination of this contract is 26 weeks”).
Class 1A NICs
From 6 April 2020 employers will be required to pay Class 1A NICs on any part of a cash termination payment exceeding £30,000.
Moreover, the NICs must be reported in real time on the Full Payment Submission, or FPS. Software adjustments are being configured in this regard.
Class 1 A NICs payments relating to ongoing benefits in kind post-termination will be expected to be reported after the tax year end in the usual way on P11D and P11D(b).
PENP
An alternative calculation for employees who are paid in equal monthly instalments is now available, as published in the October 2019 edition of Employer Bulletin (issue 80).
The alternative calculation can be used where the following circumstances apply:
- the last pay period of the employee relevant to the PENP calculation is a month; and
- the employee’s salary is paid by 12 equal monthly instalments, but
- the employee’s notice is expressed to be a whole number of days or weeks.
ICAS made representations to HMRC that difficulties arose where the conditions of s402D(6) ITEPA 2003 are not met, so the introduction of this concession is to be welcomed.
Updated guidance, which was re-issued on 29 January 2020, can be found at EIM13886.
Sporting testimonials
Any income received by a sportsperson working under an employment contract by way of testimonials and benefit matches will be chargeable to income tax and Class 1A NICs from 6 April 2020, subject to an initial annual exemption of £100,000 where an expressed or implied (this can be customary) contractual right to receive testimonial payments does not exist.
This non-contractual exemption is intended to assist sportspersons who are approaching or have ended their career.
Conclusion
Termination payments are still a complicated matter despite efforts at simplification, but at least the income tax and NICs treatment has now been aligned and there is less room for avoidance behaviour.
The piecemeal introduction of the various changes to the termination payments legislation has done little to improve clarity and transparency, however, and employers should take care to ensure that all the rules are being adhered to whenever they make a payment of this kind.