The tax treatment of termination payments should be reviewed before payments are agreed to ensure that tax is calculated correctly.
In some circumstances, a £30,000 exemption from income tax and national insurance contributions (NICs) may apply if a payment is for loss of employment. The starting point, however, is that any payment that is a reward for service should be subject to PAYE and NICs as normal. Whether or not the £30,000 exemption applies is often not clear-cut and HMRC may challenge the treatment of termination awards that have not been subject to tax and NIC.
Common risk areas that employers should be aware of include the following:
new rules effective from April 2018 introduced the concept of taxable Post-Employment Notice Pay (PENP), the calculation of which can be complex. The rules aim to treat the equivalent of notice pay as fully taxable and subject to NIC, even where the notice period is not actually worked
payments for restrictive undertakings are taxable in the same way as salary
lump-sum payments to employees who then retire may well be treated as a taxable retirement benefit. Whether or not this treatment should apply at the point the award should be reviewed on a case-by-case basis
Any excess over the £30,000 exemption of a qualifying payment is taxable through the payroll and, since 6 April 2020, Class 1A employer’s NIC has also been due on the excess over £30,000.