Remember, remember the upcoming change to national insurance contributions (NICs) on termination payments – as well as the recent change to guidance on post-employment notice pay (PENP).

Termination Payments and Employer NICCs

On 6 April 2020, the Social Security (Contributions) (Amendments) (No. X) Regulations 2020 (the Regulations) are due to come into effect. The Regulations will impact on the tax treatment of termination payments.

What does this mean for the payment of termination awards?

The general rule has been that termination payments of up to £30,000 can be made to employees tax-free. Any remaining balance is then subject to income tax but not to employee or employer National Insurance Contributions (NICs). This position will change under the Regulations.

The Regulations are intended to align employer NICs with the income tax treatment of termination awards. This will mean that insofar as a termination payment exceeds the £30,000 threshold it will be subject to employer NICs.

Termination awards will remain exempt from employee NICs if they qualify for the tax exemption on the first £30,000.

PENP Concession

HMRC has provided an alternative formula for calculating PENP where an employee is paid monthly but the notice period is not a whole number of months (e.g. 30 days, 4 weeks, etc.). In these circumstances, and depending on which month notice is served, the standard PENP calculation can produce different results. For example, if the last pay period is in June applying the standard calculation will produce a higher PENP than if the pay period fell in December.

HMRC have, therefore, produced an alternative calculation which allows an employer to use 30.42 as the number of days in the pay period pay as long as this is beneficial to the employee.