COMPLIANCE
Extension of class 1A NICs
LoraMurphy ACIPP, CIPP senior policy liaison officer, outlines imminent and significant changes affecting termination awards and sporting testimonials
D raft regulations relating to class 1A National Insurance contributions (NICs) liability of relevant termination awards and sporting testimonials were published for technical consultation in October. The consultation (http://bit.ly/2WThO2X) aimed to collect feedback on the proposed legislation in order to shape the process behind how class 1A NICs are to be reported and paid across to HM Revenue & Customs (HMRC). Prior to the consultation, and in a move long anticipated by payroll professionals, guidance on the reforms had been issued to software developers. The new measures, which have been the subject of discussion and debate since the announcement at the summer Budget of 2015, have been deliberated and delayed. At Budget 2018, however, it was confirmed that the reforms will be implemented from 6 April 2020. The National Insurance Contributions (Termination Awards and Sporting Testimonials) Bill, which was introduced into Parliament on 25 April 2019, received Royal Assent on 24 July 2019, becoming the National Insurance Contributions (Termination Awards and Sporting Testimonials) Act 2019. The new legislation has been formed, at least in part, as a result of recommendations from the Office of Tax Simplification, which place emphasis on the alignment of income tax and NICs. Though the aspiration is to simplify tax and NICs treatment on these forms of pay, many would argue that the government has failed on this occasion.
Termination awards The confirmation that class 1A NICs are to be reported and paid in line with pay as you earn (PAYE) real time information (RTI) will interest all affected parties. The introduction of liability to class 1A NICs raises significant questions about the future of payrolling benefits and also the implications the new rules will have for payroll departments. The issue is particularly prominent as, historically, class 1A NICs have never been attached to physical payments to employees but solely to the benefits they receive. Thus, the new liability is significant to the ever-changing face of payroll. ...a result of recommendations from the Office of Tax Simplification, which place emphasis on the alignment of income tax and NICs... The 13.8% class 1A NICs (employer- only) charge is being attached to relevant termination payments made to a staff member where the current £30,000 tax exemption threshold is exceeded. Statutory redundancy pay will automatically qualify for this tax exemption but any contractual element in addition
will not. From 6 April 2020, any relevant termination payments exceeding the exemption threshold will be liable to PAYE income tax, and where the termination payment is equal to or more than the post- employment notice pay (PENP) also to class 1 NICs – a charge to the employee. The class 1A NICs will also have to be reported through RTI and paid together with normal remittances. Class 1A NICs in this situation will become a real time payment – not an annual payment that falls due as a result of the employer providing benefits in kind (BIKs) – either by reporting via a P11D return or through payrolling. To establish the amount of termination payment that will be subject to income tax and class 1A NICs, a calculation is necessary, using the following statutory formula: ((BP × D) ÷ P) - T where: BP is the employee’s basic pay for the last full pay period D relates to the number of calendar days in the post-employment notice period P signifies the number of calendar days in the employee’s last pay period (usually weekly or monthly), and T is the total amount of payments or benefits received in connection with the termination. It is essential to remember that this calculation was devised to simplify a complicated situation, but it is not difficult to see that it is somewhat complex, and that it doesn’t always provide consistent figures. In the October edition of its Employer
| Professional in Payroll, Pensions and Reward | March 2020 | Issue 58 28
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