Professional March 2020

COMPLIANCE

Changes to termination payments

Susan Ball, employer solutions partner , and Lee Knight, employment solutions director, of RSMUK Tax and Accounting Limited , outline the details

W hen it comes to making termination payments, many employers still assume they can pay up to £30,000 free of tax and National Insurance contributions (NICs) despite changes to the rules in April 2018. From 6 April 2020 there is an additional factor to consider. What changed in April 2018? The changes from 6 April 2018 included: ● introducing post employment notice pay (PENP) rules to ensure that all payments in lieu of notice (PILONs)are identified and consistently subjected to tax and NICs ● removing foreign service relief on termination payments to UK resident individuals ● clarifying that the exemption for injury does not apply in cases of injured feelings. Employers must consider the PENP rules if they make any payments or provide any benefits on termination of employment that aren’t fully liable to tax and NICs. Employers, however, still do not seem completely familiar with the calculations in relation to ‘relevant termination awards’ (RTA) and PENP. Some employers also need to consider that from 6 April 2017, the taxation position of sporting testimonial payments changed. The PENP Calculation Where employers are going to make a termination payment not fully chargeable to tax and NICs, the rules require employers to carry out a calculation to identify the PENP and then apply tax and a class 1 NIC charge on this amount, meaning that the PENP would not benefit from the £30,000 exemption under section 403 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA). The PENP calculation is essentially designed to calculate the amount of the RTA on which tax and NICs would have been paid had the employee worked

(and been paid) their full notice period or received a contractual payment in lieu of notice (PILON). ...the rules require employers to carry out a calculation to identify the PENP... What’s changing in April 2020? The necessary legislation introducing employer’s class 1A NICs was enacted via the National Insurance Contributions (Termination Awards and Sporting Testimonials) Act 2019 (‘the Act’) which received Royal Assent in July 2019. It has effect from a day to be appointed, which is likely to be 6 April 2020. The Act introduces an employer class 1A NICs charge, but not employee NICs, on these two types of payment: ● Termination payments taxable under section 403 ITEPA; as with income tax, the first £30,000 of such a payment is exempt from the class 1A NICs charge. ● Payments connected with sporting testimonials. If it applies, only any excess over £100,000 is subject to the class 1A NICs charge. The controller of the testimonial (if not the employer) is liable for this charge. The draft regulations include provisions enabling HMRC to pursue cases where the liable party has failed to report or pay class 1A NICs liabilities arising on both cash or cash equivalent, and other termination payments and sporting testimonial payments. This includes applying the appropriate late payment interest and penalty provisions, as well as the appropriate repayment provisions. For employers, the first obvious impact will be additional costs. Those currently planning on making termination payments,

especially large re-structuring/redundancy exercises, might therefore want to consider expediting these arrangements to avoid such costs. Practical application A few basic points to note. ● Whereas class 1A NICs are normally considered to be an annual charge (relating to the P11D(b) return), this new charge will be reported via real time information and paid as part of the monthly/quarterly remittance to HMRC. ● Neither the apprenticeship levy nor student loan deductions will be applicable on termination payments; however, those in excess of £30,000 should be included in P45 forms and P60 certificates, as with all pay that is chargeable to tax. ● If the termination payments are staggered there are two options for reporting: ❍ using the existing payroll ID, in which case the year to date (YTD) figure as well the previously paid/ reported information should be included, or ❍ by creating a new payroll ID, where the previously submitted YTD figures do not need to be included. n termination payment-related topics can be found in HMRC’s Employment Income Manual from EIM12800 (http://bit.ly/2vVweGp), including the answers to common questions (EIM12830). ● Extensive guidance on PENP with calculation examples can be found in HMRC’s Employment Income Manual from EIM13880 (http://bit. ly/2OuoFwM). ● Advice on an employer’s PAYE responsibilities can be found in the CWG2: Employer further guide to PAYE and National Insurance contributions (http://bit.ly/2GrBbcq). Technical guidance ● Guidance on a wide range of

| Professional in Payroll, Pensions and Reward | March 2020 | Issue 58 34

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