HMRC has updated its Employment Income Manual to reflect the changes to the taxation of termination payments (including payments in lieu of notice or PILONs) that apply to payments made on or after 6 April in respect of employment ended on or after that date.
The changes cover two areas:
(a) the “post-employment notice pay” (or PENP) element of any termination payment is treated as general earnings subject to income tax and Class 1 NICs; and
(b) the remainder of the termination payment is subject to income tax above the £30,000 exemption threshold (subject to exemptions applying to statutory redundancy payments and approved contractual payments).
The PENP is calculated under a statutory formula but, broadly, equates to the employee’s entitlement to basic pay during his or her notice period.
In addition, the amount of all non-PENP termination payments above £30,000 will be subject to Class 1A (employer’s) NICs from 6 April 2019.