National Insurance Contributions on Termination Payments

32 ADVICE

Legislation update: National Insurance Contributions on termination payments

otherwise known as settlement payments or they would have received if they had worked Jacinta McKiernan redundancy payments there are new rules their notice in full, even if they are not paid a Practice Management Consultant NICs that must be followed. contractual PILON. Tis means the tax and NICs consequences are the same for everyone ‘Although the employer NICs and it is no longer dependent on how the treatment of termination employment contract is drafed. Te PILON payments will change on amount will be treated ‘as earnings ‘and will n some circumstances, employers may not be subject to the £30,000 Income Tax have to make termination payments 1 April 2020, the existing exemption for other termination payments to employees when their employment employee Class 1 NICs such as redundancy pay. comes to an end. Termination exemption will be retained’ Te last remaining measures for Ipayments are used in matters relating to termination payments commonly relating settlement agreement, capability, conduct In April 2018, changes were introduced to settlement pay and redundancy pay had and redundancy. Where employment to all PILONs to be both taxable and subject been delayed in 2018. Tese changes were termination payments are identifed ‘as to Class 1 National Insurance Contributions originally drafed in the National Insurance earnings’, these termination payments (NICs). Te legislation requires the Contributions Bill published in 2016. are subject to normal tax and National employer to identify the amount of basic pay Previously employers were not required Insurance Contributions (NICs). Tese that the employee would have received if to pay 1A NICs to payments ‘in excess of payments are commonly referred to as they had worked their notice period. PILON £30,000 threshold’. However, from 1 April payments in lieu of notice (PILONs) or is a payment made to an employee when 2020 this payment will now be subject to post-employment notice pay (PENP), employment is terminated without notice, class 1A National Insurance contributions, when communicating with HMRC. With instead of the employee working through as an ‘employer liability only’. An employer other termination payments that are a notice period and receiving pay in the will be required to pay NICs on any part normal way. of a termination payment that exceeds the Te changes £30,000 threshold and collected in ‘real-time’, were introduced as part of the employer’s standard payroll to to bring clarity HM Revenue and Customs (HMRC). for employers Although the employer NICs treatment of to the taxation termination payments will change on 1 April of termination 2020, the existing employee Class 1 NICs © Westend61/Getty Images Plus Westend61/Getty © payments by exemption will be retained for these types of making it clear termination payments even if the payment that all PILONs, exceeds £30,000. rather than Furthermore, the existing £30,000 Income previously just Tax exemption will also be retained for these contractual payments associated with the termination of PILONs, are employment. taxable earnings. Te new employer NICs rule doesn’t need All employees updating in these advice notes nor does will pay tax and any elements relating to other termination Class 1 NICs on payments such as PILON. ◆ the amount of basic pay that https://doi.org/10.1038/s41404-020-0325-8