National Insurance Contributions (Termination Awards and Sporting Testimonials) Bill — House of Commons, 2019-04-30
Topic: Macroeconomics
Robert Edward Jenrick (Conservative, Centre-right): I beg to move, That the Bill be now read a Second time This is a small and narrowly drawn, but nonetheless important, Bill. It aims to provide a welcome simplification of the tax treatment of termination awards and sporting testimonials. The corresponding rules determining the income tax treatment of termination awards and sporting testimonials were legislated for in the Finance Acts of 2016 and 2017. At that time, it was made clear that we would return and replicate those rules in national insurance legislation in due course, to ensure that there was not a persistent misalignment. Implementation of the measures in this Bill will replicate those rules in national insurance legislation. By the nature of national insurance, it is required to have a separate piece of legislation from the Finance Bill These measures were first announced at Budget 2015. They were then consulted on and published in draft in December 2016. They were subsequently reconfirmed at Budget 2018, so it is reasonable to say that they are expected by those affected and have been subject to much scrutiny. Together, they mean that a 13.8% class 1A employer national insurance charge will be applied to income derived from termination awards and sporting testimonials that are already subject to income tax Let me first set out the measure that covers termination awards. Between 2013 and 2014, the Office of Tax Simplification reviewed the tax treatment of employee benefits and expenses. The OTS published an interim report in August 2013 identifying termination awards as one of a number of priority areas. It found that relatively few employers and employees properly understood the regime. There was confusion, and the regime was therefore ripe for reform and simplification The OTS specifically identified three areas of misunderstanding on which it recommended we take action. First, certain forms of termination awards are exempt from employee and employer national insurance contributions and the first £30,000 is free from income tax. However, there is a common misconception that the first £30,000 of any termination payment is automatically tax free. Secondly, many employers believe that this exemption applies where in fact it does not, and thirdly, employers are unaware of the different income tax and national insurance treatment of termination payments Following the OTS recommendations, the Government announced at Budget 2016 that they would be reforming the tax and national insurance treatment of termination awards. As I said, the reforms to the income tax treatment of termination awards were legislated for in the Finance (No. 2) Act 2017 and took effect from April 2018. The Government confirmed at Budget 2018 that the associated reforms to national insurance legislation would be in place for April 2020. However, the fact that termination awards are currently subject to different income tax and national insurance treatment has created confusion, and that is what we are attempting to deal with today. Moreover, the current misalignment incentivises an admittedly small number of well-advised employers to disguise final payments as compensatory termination awards that benefit from a national insurance charge exemption. These reforms will close that loophole The Bill will place a 13.8% class 1A employer national insurance charge on income derived from termination awards on amounts over £30,000. However, I want to assure hon. Members that, when it comes to employee national insurance, these payments will remain entirely exempt. We have chosen to continue to ensure that employees will not face any additional liability as a result of these changes in terms of employee national insurance. This measure will raise around £200 million per annum for the Exchequer, which will make an important contribution to our public services. As this is a Budget measure, this sum has already been reflected by the Office for Budget Responsibility in its projection for the public finances Let me turn to the second measure in the Bill, which deals with aligning the employer class 1A national insurance treatment of income from sporting testimonials with the income tax treatment. As many hon. Members will be aware, a sporting testimonial is a one-off event—or series of related events—held on behalf of sportspeople who have played for a certain club for a long time. This often takes the form of an exhibition match involving famous players from the past and present. The testimonial can be used to raise money for the sportsperson before retirement, or sometimes to raise money for charity. The relevant income tax changes were debated and came into force from April 2017. As stated at the time of the Finance Bill—later the Finance Act 2016—the rules governing sporting testimonials are now changing to give clarity to the national insurance treatment as well Currently, when a sporting testimonial is non-contractual or non-customary, it can be organised by a third party, rather than the club or employer, to raise money without it being subject to NICs. Where the employer arranges the testimonial, or if it is part of the contract, or if there was an expectation that the sportsperson would be entitled to one, the testimonial is already subject to income tax and NICs.