New Tax Rules for Termination Payments

'The HM Revenue and Customs Employer Bulletin issue 70' has reported that there will be new rules for termination payments made on, or after 6 April 2018

As an employment lawyer terms such as the 'PENP' will be alien..

'Payments in lieu of notice'

With effect from 6 April 2018, some payments and benefits made in connection with the termination of an employment will be chargeable to income tax and Class 1 National Insurance Contributions (NICs) as general earnings and will not benefit from the £30,000 threshold. This change applies to payments, or benefits received on, or after 6 April 2018 in circumstances where the employment is also ended on, or after 6 April 2018. The legislation being introduced splits payments and benefits, which fall within Section 401(1) ITEPA 2003, into two elements.

The first element, post-employment notice pay (PENP) is taxable as general earnings and will be subject to Class 1 NICs from 6 April 2018, subject to parliamentary approval. The PENP represents the amount of basic pay the employee will not receive because their employment was terminated without full, or proper notice being given.

PENP is calculated by applying a formula set out in the legislation to the total amount of the payment, or benefits paid in connection with the termination of an employment.

The second element is the remaining balance of the termination payment, or benefit, which isn’t PENP. This is taxable as specific employment income to the extent that it exceeds £30,000 and is treated in the same way as other payments and benefits taxable under section 403 ITEPA 2003.
PENP calculations should not be applied to statutory redundancy payments. These payments are always taxable as specific employment income and subject to the £30,000 exemption where appropriate.

As an employer you will be required to apply the PENP formula to the total amount of relevant termination payments, or benefits. You should operate PAYE to deduct income tax and Class 1 NICs from the amount of PENP from 6 April 2018. You should then apply the £30,000 exemption, where applicable, to the second element of the relevant termination payment and deduct income tax (but not NICs) accordingly.