With most employer’s minds currently focused on the upcoming changes to the IR35 regime, it’s important they do not forget about forthcoming updates to the tax treatment of termination payments which are also due to take effect next month.
Employer’s NIC on Termination payments
Currently, the only tax on termination payments made to employees to compensate them for their loss of office is income tax where the payment exceeds £30,000. The tax charged is payable on the excess. From 6 April 2020, as well as income tax on payments exceeding the threshold, employer’s Class 1A National Insurance contributions (NICs) will also be due. This additional cost should be taken into account when negotiating settlements and will need to be reported through the PAYE/Real Time Information process.
Employers should note that the NICs liability will not apply to any termination awards paid after 5 April 2020 in respect of employment which was terminated before 6 April 2020. Employers intending to dismiss an employee and paying a termination payment in excess of £30,000 may therefore want to ensure the termination date falls before 6 April, as this could result in a significant NICs saving.