Finance Bill 2020-21: changes to tax treatment of termination payments

The government intends to bring in measures to remove unintended outcomes and bring fairness and clarity to the current legislation on termination payments, by making it clear that individuals will not receive less favourable tax treatment depending on their contract or residency

Finance Bill 2020-21 includes a clause amending the income tax treatment of termination payments in two ways.

Firstly, it provides a new calculation for post-employment notice pay (PENP) for employees paid by equal monthly instalments whose post-employment notice period is not a whole number of months.

The PENP is the part of a termination payment which is treated as being a payment in respect of the employee’s notice period and subject to income tax and employee’s and employer’s National Insurance contributions.

This measure provides an alternative PENP calculation where an employee’s pay period is defined in months, but their contractual notice period or post-employment notice period is not a whole number of months.

Secondly, the clause also brings PENP within the charge to UK tax for individuals who are non-resident in the year of termination of their UK employment.

Currently, PENP is not chargeable to UK tax if an employee is non-resident for the tax year in which their employment terminates.

The measure will ensure that non-residents are charged to tax and National Insurance contributions on PENP to the extent that they would have worked in the UK during their notice period. This change only affects individuals who physically performed the duties of their employment in the UK.

The clause will take effect from 6 April 2021, and will apply to those individuals who both have their employment terminated and receive a termination payment on or after 6 April 2021.

Changes to the treatment of termination payments and post-employment notice pay for Income Tax is here.

By Pat Sweet

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