In the Budget announced earlier this year, the then Chancellor George Osborne revealed a few surprises. The key announcement for employers being the introduction of compulsory National Insurance Contributions (NICs) on termination payments over £30,000, and an increase in the threshold for personal tax contributions.
This announcement dictates that from April 2018, tax and National Insurance (NI) treatment of payments made by employers when they terminate employees is to be more closely aligned. It means that employer’s (but not employee’s) NI will be charged on all termination payments that exceed £30,000 in the future. This will be an additional cost to employers – potentially making these redundancies much more expensive in the future. This is clearly not the end of the complex treatment of termination payments, which continue to evolve – had the £30,000 exemption kept pace with earnings it would now be in excess of £72,000.
HMRC are also planning on consulting on wider changes to the tax and NI treatment of termination payments including:
– abolishing the Foreign service exemption, which eliminates or reduces tax on termination payments where an individual has worked overseas
– taxing Payments In Lieu of Notice (PILONs) irrespective of whether they are contractual in nature or not
– bringing in new rules to prevent contractual termination payments being “disguised” as damages in order to avoid tax and NI on them.
There are three main areas that this change in legislation will have most effect, these are as follows.
Termination of Employment
Termination payments above £30,000 to be subject to employer National Insurance contributions (NICs). Currently, termination payments above £30,000 only attract income tax, not NICs. While employer NICs will be payable under the new proposal, employee NICs won’t. At 13.8%, the addition of employer NICs could add a not inconsiderable cost to paying a termination payment exceeding £30,000.
Payments in Lieu of Notice (PILONs)
All payments in lieu of notice (PILONs), contractual and non-contractual are to be taxed as income. Currently, contractual and non-contractual PILONs are taxed differently. Contractual PILONs, that are provided for in the employment contract, are treated as earnings and subject to income tax and both employer and employee NICs. Non-contractual PILONs, which are paid in the absence of the contractual right to do so, are subject to income tax, but not NICs. It isn’t always straightforward to determine whether a PILON is contractual or not given that HMRC can also have regard to the regularity with which the employer pays PILONs. This clarification is actually welcome given the differences in opinion which can arise when negotiating a settlement agreement.
Injury to feelings awards (such as for harassment or discrimination) will not qualify for general injury tax exemptions. There is an exemption to income tax on termination payments, in addition to the £30,000 threshold, when a payment is made because of death, disability or injury of the employee. It is currently unclear whether injury to feelings awards qualify for the exemption as there have been contradictory decisions on the point. This proposal would provide additional welcome clarity, but in common with all 3 proposals, means increased cost to employers.
With these changes being introduced and further clarification expected, it’s advised that you discuss the implications of any of these situations with an Accountant to ensure your business is complying in full.