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Updates from the Clayton & Brewill team.
Changes to termination payments
Since 6 April 2018, employers are required to pay Income Tax and Class 1 National Insurance contributions (NICs) on termination payments, regardless of whether or not they are contractual payments. Sarah Pownall, Payroll Manager at Nottingham chartered accounts Clayton & Brewill explains the changes.
What are the changes to termination payments?
Since 6 April, all employers are required to pay NICs on any part of a termination payment that exceeds the £30,000 threshold.
In addition, all payments in lieu of notice (PILONs) will be subject to Income Tax and Class 1 NICs and will be calculated on the amount of basic pay that would have received if the employer had worked their notice in full.
This means the tax and NICs consequences are no longer dependent on how the employment contract is drafted or whether payments are structured in some other form, such as damages.
These changes apply to payments, or benefits received on, or after, 6 April 2018 in circumstances where the employment also ended on, or after, 6 April 2018.
There are also changes to certain exemptions in the termination payments legislation. It removes foreign service relief and clarifies that the exemption for injury does not apply in cases of injured feelings.
What do I need to do as an employer?
As an employer, you will need to identify the amount of basic pay that the employee would have received if they had worked their notice period, even if the employee leaves part way through their notice period.
The amount will be treated as earnings and will not be subject to the £30,000 Income Tax exemption.
All other termination payments will be included within the scope of the £30,000 termination payments exemption.
For more information on termination payments visit the HMRC website