· Features

Imminent changes to termination payments

From 6 April a new employers’ class 1A National Insurance contribution (NIC) of 13.8% will be chargeable on any termination payments in excess of £30,000

This brings the treatment of termination payments for NIC purposes in line with the rules on the income tax treatment of termination payments, where income tax is already payable on termination payments above this threshold.

According to HM Treasury the change will 'deliver an important simplification of the UK tax system'. It is of the view that because termination awards are subject to different tax and NI treatments this causes confusion for employers.

This change was initially due to take place in April 2018. The revised implementation date may have slipped under the radar for some employers, but it is a significant development. It will mean additional costs and increased administration for employers where the termination payment is more than £30,000.

Employment that terminates on or after 6 April 2020

According to HMRC's February 2020 employer bulletin the new NICs charge will only apply to termination payments made in respect of employment that terminates on or after 6 April 2020. Even if the termination payment itself is not made until the 2020/21 tax year, if the employment to which it relates terminated on or before 5 April 2020 the new NICs charge will not apply.

Where possible it is therefore sensible to opt for payment in lieu of notice, if that allows the employee's termination date to be brought forward before 6 April 2020, rather than the employee working their notice or being on garden leave.

Depending on the wording of the employment contract (or settlement agreement, if applicable) the employer may still have the right to stagger PILON payments, minimising any negative impact this approach may have on cash flow.

HM Treasury estimates that the change will affect around 20% of termination awards. Even so, this will clearly have a financial impact on employers. For example, if the termination award is £40,000 and the £30,000 exemption is applied this leaves a balance of £10,000.

The new NICs charge at 13.8% will mean an additional £1,380 payable by the employer. If there are a number of employees receiving a termination award at a significantly higher sum than £40,000 the increased costs to employers could be considerable.

Real-time collection

The new NIC charge will be collected through real-time information/PAYE as part of the payroll process. It will need to be paid and reported to HMRC at the time the NIC liability arises, rather than after the end of the tax year. This will increase administration for employers and the appropriate payroll software will need to be in place.

Advice for employers

While employers, understandably, are currently focusing their attention on the challenges posed by the Coronavirus, they do need to be aware of this important change regarding termination payments and the new NIC charge. Not only because of the increased costs and administration, but also because in the coming months many thousands of employees are at risk of losing their jobs because of the Coronavirus and in many instances a termination payment could be made to which the new legislation will apply.

It’s important to note this legislation only introduces employer NICs on termination payments more than £30,000; although the employee will have to pay income tax on the same amount (under rules already in place) they do not have to make employee NICs on this amount.

Madeleine Mould is a solicitor in the employment law team at Blake Morgan

Further reading

How easy is it to claw back bonuses from senior executives?

Legal lowdown: Post-termination restrictions

Five top tips for giving notice of dismissal to employees

The importance of tailoring restrictive covenants