PAYROLL INSIGHT
Termination payments – the saga continues
Peter Minchinton, employment taxes senior manager for PSTAX, reviews the new tax and NICs rules and explains some areas of uncertainty
T he new rules regarding payments in lieu of notice (PILON) came into effect from 6 April 2018 introducing the concept of post- employment notice pay (PENP). These ensure that any relevant termination awards made in connection with the termination of employment are subject to income tax and National Insurance contributions (NICs) in full, to the extent that the employee has not been given their full notice period. The idea is that the distinction between and difficulties created by whether PILONs are contractual/non- contractual and/or automatic/customary are now ended. The rules use the statutory formula (BP x D)/P – T to arrive at the payment that must be subject to tax/NICs. As with any new piece of legislation, there remain some areas of uncertainty and the PSTAX helpline has certainly received a number of queries regarding the interpretation of the methodology, including the following. In the formula, ‘P’ refers to the number of days in the previous pay period before the termination ended. It has been pointed out that this will produce different results in different months for the PENP value even where the number of days (‘D’) of unworked notice and ‘BP’ (basic pay in the previous month) are the same. In other words, if the termination of the employment ends in March the value of P will be 28 (or 29 in a leap year), whereas in other months the number will either be 30 or 31. Clearly, this will create different
outcomes and it has been queried whether the average number of 30.41 should be applied regardless of when the termination takes place. Whilst there is a certain logic to this, the law requires the number of actual days to be used, regardless of these disparities. ...this will produce different results in different months for the PENP value ... Before the guidance had been issued, a number of commentators had speculated that employers would be able to disregard any redundancy payments (statutory or otherwise) from the definition of the relevant termination award. However, having read the legislation and the relevant HM Revenue & Customs (HMRC) guidance, only statutory redundancy pay can be so disregarded. Had the rules allowed non-statutory redundancy to be excluded this would have given employers the opportunity of ‘re-labelling’ payments as being on account of redundancy to reduce the value of the taxable PENP. The PSTAX helpline received an interesting query in connection with a PENP calculation where the employee resigned and received a payment that was deemed to be a ‘relevant termination award’ in respect of the termination of the employment. The employee was asked to leave immediately; the payment
comprised a month’s PILON plus two months’ pay as additional compensation. The issue to consider here was that under the terms of the contract the employee was required to give one month’s notice; however, the employer was required to give two months. Therefore, should the PENP calculation be based on one month or two? Logically, the correct answer would be to use one month as that was the time the employee should have worked once he resigned, but didn’t actually do so. However, the legislation (and associated guidance) states that the PENP should be based on the notice due from the employer. Consequently, the calculation is based on the longer period of two months. It may seem a harsh interpretation; however, employers have to follow the letter of the law as it is written. We understand that most local authorities and other public bodies will make a PILON at full pay even in circumstances where employees have been paid at half- or zero-pay for prior months. The question has been raised whether someone who is off on sick leave and only receiving half-pay when the employment is terminated, should have their BP in the PENP formula calculated by reference to the pay they would have received had they not been sick or the half-pay actually received. In the HMRC Employment Income Manual (https://bit.ly/2fBrg8a), BP is defined as “the total employment income the employee receives, or has the right to receive (even if they give up that right)
| Professional in Payroll, Pensions and Reward | October 2018 | Issue 44 28
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