PAYROLL INSIGHT
Termination payments, etc
Duncan Groves, director and head of employment taxes at PSTAX, outlines the impending rules for class 1A liabilities, and provides an update on two other issues
Class 1A NICs On 16 October, HM Revenue & Customs (HMRC) published a consultation on the draft Social Security (Contributions) (Amendment No. X) Regulations 2020 (http://bit.ly/2WThO2X). The consultation seeks views on the new rules relating to the payment and reporting of class 1A National Insurance contributions (NICs) on termination awards and sporting testimonials through real time information (RTI). As has become common under recent governments, the ‘consultation’ should be more accurately described as ‘recognition’ or ‘contemplation’ as the legislation has been fully drafted and is ready to become law once laid before parliament. Given the uncontentious nature of the changes being introduced, we would not expect any opposition within parliament, regardless of the composition of the House of Commons following the general election. Alongside the draft legislation mentioned above, the National Insurance Contributions (Termination Awards and Sporting Testimonials) Act 2019 (http://bit. ly/2pOtLe0) has simultaneously confirmed that class 1A NICs will be payable for a tax year on a termination award that counts as employment income and is chargeable to income tax by virtue of section 403 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA), but is not earnings upon which class 1 NICs arise. In layman’s terms, this means that, where an employer makes a genuine termination payment of an amount greater than £30,000, then there
will be, from 6 April 2020, an obligation to deduct and account for class 1A NICs in addition to income tax on the excess. Unlike the payment of current class 1A NICs liabilities which are paid and reported after the end of the tax year in which they arose, the new class 1A NICs will be subject to RTI legislative provisions, at least insofar as they relate to cash or cash equivalent termination awards. ...an obligation to deduct and account for class 1A NICs in addition to income tax on the excess In respect of termination awards which include benefits in kind, the provisions will also apply but the payment and reporting requirements will mirror the current class 1A NICs provisions. For example, where a car is provided to an employee after termination, the annual class 1A NICs payment and reporting provisions will apply to the new class 1A NICs liability, since these liabilities can only be determined after the accompanying tax liability has been determined. Termination ‘packages’ can, of course, contain numerous elements. Employers will need to know which elements first count towards the £30,000 exemption, in order to correctly account for the class 1A NICs
liabilities due. Therefore, the legislation sets out the ‘order’ in which the £30,000 exemption should be ‘allocated’ as follows: 1. the cash benefit 2. any benefit consisting of an asset where ownership has been transferred to the employee, and 3. any other benefit consisting of an asset made available to the employee without any transfer of ownership. A notable inclusion within the new legislation, although less relevant to the public sector, is the change in relation to sporting testimonials, whereby class 1A NICs will be payable for a tax year in respect of general earnings received by an earner (professional sportsperson) which consist of a sporting testimonial payment to the earner by the ‘controller’ of a sporting testimonial committee. Both of the changes are due to take effect from 6 April 2020. Aside from the potential payroll software implications of these changes, we envisage that most public bodies will find compliance straightforward. The most important issue for employers will be the planning necessary to avoid unwelcome additional costs associated with termination of employment. For example, where employees are expecting to leave on or around the beginning of April 2020, and their termination payments/benefits are likely to exceed £30,000, there will be obvious savings to be achieved through expediting processes and avoiding the 6 April 2020 trigger date. In case readers wish to comment on the proposed legislative changes, it should be
| Professional in Payroll, Pensions and Reward | December 2019 - January 2020 | Issue 56 18
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