PAYROLL INSIGHT
Termination payments
John Harling, employment taxes specialist at PSTAX, reviews recent developments and forthcoming changes
N umbers published recently by the Office of National Statistics show that there has been a very noticeable decline in levels of employment in local government and the public sector generally with approximately a million fewer employees working in the sector compared with the position in 2009. Public sector bodies have been required to make a greater number of redundancy and termination payments and have to be increasingly mindful that the potential exemptions regarding tax and National Insurance contributions (NICs) are applied correctly. The tax/NICs rules can be quite complex and difficult to interpret at times and recently the government has sought to make changes to update these. consultation on proposed changes to the tax and NICs rules in respect of termination payments applying to redundancy/ compensation payments and also draft legislation for further consultation. Based on the 2015 consultation proposals, we had expected some fundamental changes. These would have seen the blanket £30,000 tax exemption for payments to which the exemption applies being replaced with a system where the level of tax exemption allowable would have been based on length of service. Furthermore, the new tax exemption would have applied only in circumstances of genuine redundancy. However, in the 2016 consultation the government stated that it will not go ahead with removing the £30,000 exemption or limiting the exemption to cases of redundancy. Nevertheless, there are still some important changes afoot which will apply from April 2018 that are summarised below: ● All payments in lieu of notice (PILONS) will be subject to tax and NICs in full as earnings. Currently, PILONS that are deemed to be contractual are treated as In August 2016, the government published a response to its 2015
a subject to tax/NICs in full. However, non-contractual payments can be included within the £30,000 exemption – and are completely free of NICs – if they are purely discretionary, but can also be caught as fully liable where they are considered an automatic response to a termination situation or they are paid customarily. The current rules are difficult to interpret, so the changes will simplify the position. ● All other payments made after the employment has ended and which would have been treated as general earnings if the employee had worked their notice period will be subject to tax and NICs in full. ● Where a payment is made directly in consideration of the termination of employment this will be exempt from tax up to £30,000 as is the case now. However, for NICs purposes, whilst such payments will continue to have an unlimited exemption for employee’s NICs, employer’s NICs will be charged on any payment over £30,000 where they are also subject to a tax charge. Unlike the changes proposed in 2015, the exemptions will continue to apply to genuine compensation payments on termination of employment even if they do not relate to a redundancy situation. ● The additional exemption for employees who have worked overseas, known as foreign service relief, will be removed, although such employees will continue to benefit from the £30,000 tax exemption. This will have very limited relevance for local government employers and employees appropriate legal advice, should be taken where these rules may apply ...great care, as well as
● The current exemptions that apply in cases of death, disability and injury payments will continue to apply; however, the exemption where the payment is made in respect of ‘hurt feelings’ will be removed. In summary, while the changes were not quite as fundamental as had been expected, employers should make sure they are fully prepared for them from a financial, human resources and payroll perspective. Related to these changes – and in response to a number of large termination payments settlements in the public sector in recent years – are the imminent changes to the rules regarding the imposition of a £95,000 cap for public bodies on the overall level of payments that can be made by such employers in cases of termination/ redundancy. At the time of writing, the government has advised that the new rules will not apply earlier than 1 October 2016, although the actual date is still to be confirmed. The cap will apply to lump sums payments, which includes statutory and non-statutory redundancy pay, ‘pensions strain’ payments and other non-financial benefits such as additional paid leave. However, the cap will not apply to payment in lieu of holidays, bonuses, or payments following a ‘TUPE’ (transfer of undertaking protection of employment) transfer. Rule changes are also imminent in respect of certain higher-paid individuals in the public sector who will be required to repay any exit payments if they are re-employed in the public sector within a specified period. These changes impose requirements on the old and new employer in such cases, so careful consideration and planning are advisable. These regulations have been drafted, but again we await confirmation of the starting date. These changes are potentially very significant for public bodies and great care, as well as appropriate legal advice, should be taken where these rules may apply. n
| Professional in Payroll, Pensions and Reward | November 2016 | Issue 25 16
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