HMRC amends rules on termination payment tax

HMRC has updated guidance on the new rules for the taxation of termination payments, introduced to counter manipulation of the system, to reflect changed dates in relation to employer national insurance contributions (NICs) and to sporting testimonials

The government first announced in Budget 2016 that it wished to change the rules around paying income tax and Class 1 NICs on an element of all termination payments, whether or not they are contractual payments.

This element is the amount of the termination payment that represents payment in lieu of notice (PILON).

The change applies to payments, or benefits received on, or after, 6 April 2018 in circumstances where the employment also ended on, or after, 6 April 2018.

Now HMRC has said the date has changed for when Class 1A NIC employer charges on termination payments of more than £30,000 and on sporting testimonials of more than the £100,000 lifetime exemption are due to come into effect.

These also been due to be included with the other element, but as a result of the delay in legislation, these are now due to come into effect in April 2020.

HMRC said the measure is intended to bring fairness and clarity to the taxation of termination payments by making it clear that all PILONs, rather than just contractual PILONs, are taxable earnings.

All employees will pay income tax and Class 1 NICs on the amount of basic pay that they would have received if they had worked their notice in full, even if they are not paid a contractual PILON.

This means the tax and NICs consequences are the same for everyone and are no longer dependent on how the employment contract is drafted or whether payments are structured in some other form, such as damages.

Report by Pat Sweet

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