Changes to the Taxation of Termination Payments

The U.K. government has introduced the following changes to termination payments which will apply from 6 April 2018:

• Where an employer has no contractual right to make a payment in lieu of notice, but decides to make a termination payment, it will have to apply a formula to determine the amount of that payment which makes up “post-employment notice pay” (PENP). Broadly speaking, the PENP is equivalent to the amount of basic pay that the employee would have received had the employee worked their notice period. The formula to be applied will depend on whether or not employees are paid monthly. The PENP will be subject to tax and national insurance contributions (NICs).
• The first £30,000 of the balance of the termination payment (if any) will in principle not be subject to tax or NICs. Any amount in excess of £30,000 will be subject to tax, but not NICs (although the government has plans to make such excess subject to employer’s NICs from April 2019).

However, it remains the case that:

• A payment in lieu of notice made pursuant to a contractual clause will be subject to tax and NICs.
• Statutory redundancy pay will continue to be exempt from tax and NICs.

Although the aim of these changes was to simplify the taxation of termination payments, it may in practice make the position more complicated and will likely make termination payments more costly for employers.