Tax

Termination payments | HMRC update and further NICs changes coming soon

Written on 4 Feb 2020

In recent months, HMRC has published some helpful updates and amended guidance on post-employment notice pay (PENP) for employees who are paid by equal monthly instalments.

More widely, the introduction of employer’s class 1A national insurance contributions (NICs) on termination payments above the £30,000 threshold are due to take effect from 6 April 2020.

New PENP formula for employees paid by equal monthly instalments

On 4 December 2019, HMRC published its regular Employer Bulletin. This includes an update and clarification from HMRC on the calculation of PENP for employees who are paid by equal monthly instalments.

HMRC, advisers and payroll personnel have been aware since the new rules on the taxation of termination payments came in on 6 April 2018 that the formula to calculate PENP may create unintended outcomes in certain circumstances. HMRC has acknowledged that issues may arise where an employee's contract creates payment periods in months, but they have a notice period in weeks or days.

HMRC has updated its guidance so that, from 16 October 2019, the following alternative calculation may be used in such circumstances.

Where:

  • the last pay period of the employee to end before the trigger date is a month, and
  • the employee’s salary is paid by 12 equal monthly instalments, and
  • the post-employment notice period is not a whole number of months (in which case the calculation by months should be used instead)

then the employer may substitute 30.42 (being 365 ÷ 12) as the value of P in the PENP calculation where doing so is to the advantage of the employee.

This is a helpful clarification (although in an ideal world the alternative calculation would be enshrined in the applicable legislation rather than set out in HMRC guidance).

Employer's class 1A NICs on termination payments above the £30,000 threshold

The introduction of employer’s class 1A NICs on termination payments above the £30,000 threshold are due to take effect from 6 April 2020.

HMRC's consultation on the draft regulations for real-time reporting of Class 1A NICs on such termination awards closed on 16 January 2020.

A number of industry bodies have responded to the open consultation. In particular, the Institute of Chartered Accountants in England and Wales has sought confirmation that the Class 1A NICs on these payments will be shown separately from other PAYE data on employers' business tax accounts, and has recommended that a new class name (such as Class 1C) should be used for these contributions to distinguish them from Class 1A NICs on benefits in kind that are paid after the year end.

A response to the consultation is expected to be published soon.

In the meantime, employers should be preparing themselves for the additional employer's NICs costs which will be payable on termination payments above the £30,000 threshold from 6 April 2020.