At the moment, redundancy, compensation and termination (ex-gratia) payments above £30,000 do not attract national insurance. There are also some circumstances when notice pay can be paid to an employee without deductions.

However this is set to change next year.

From 6 April 2018, the following will apply:

  • Employer Class 1A national insurance on any compensation amounts over £30,000 will be payable.
  • If there is a payment in lieu of notice, the basic pay which the employee would have received during their notice period must have tax and national insurance deducted. Employer NI will also be payable. This will apply even if there is not a payment in lieu clause in the contract.
  • The disability exemption will not apply for injury to feelings, it will only apply if there is a psychiatric injury.

To save costs, employers are likely to want to have termination dates and payments taking effect before next April.

If you are considering redundancies, a mutual termination or without prejudice/section 111A discussions, we recommend you seek legal advice on recording payment through Settlement Agreements to ensure the additional costs are avoided.