This part of ITEPA 2003 has seen significant changes brought in from the Finance (No.2) Act 2017 and Finance Act 2018, which affects the UK tax position on certain termination payments. It is now imperative to clearly identify what each payment on termination represents. The changes include:
- The new Post Employment Notice Pay (PENP) formula;
- injury to feeling being defined;
- payments in lieu of notice (PILON) payments;
- national insurance; and
- foreign service relief.
Part of a termination package (payment and benefits) received on or after 6 April 2018, in respect of a termination on or after 6 April 2018, may no longer benefit from the £30,000 threshold. The revised legislation is complex and requires careful review of the facts surrounding termination.
The first hurdle is to calculate the PENP using the HMRC formula followed by working out what the relevant termination award is.
Details now required to help calculate this new formula includes the following:
- Details of employee’s previous pay including breakdown of each element (a copy of a payslip should provide sufficient information);
- What is the employee’s pay period (weekly, monthly etc);
- establish if the employer or employee give notice of the termination;
- last working date of employment;
- notice period;
- details of employee’s final pay package including breakdown of each element (copy of payslip);
- breakdown of any benefits; and
- date of termination being made;
The calculation is complex but could result in part of the PENP being subject to income tax as general earnings.
In addition to the above, the legislation now emphasises what injury outside of physical can include and what is excluded such as injury to feelings (previously there had been no clear definition). The case of Krishna Moorthy v HMRC, did show the Court of Appeal favouring the taxpayer by allowing the discrimination related compensation for injured feelings to form part of the termination payment and had also fell to be exempted from tax. However, this case will only be relevant for termination payments received before 6 April 2018 and in respect of a termination before 6 April 2018.
All PILONS including non-contractual will now be subject to PAYE tax and class 1 national insurance (employer and employee) and treated as earnings outside of any termination payment. Any PENP that would be chargeable to income tax as general earnings (outcome from the new formula) will also be subject to both employer and employee class 1 national insurance.
Employers will be required to pay class 1 employer national insurance on any part of a termination payment that exceeds £30,000. Employees will not be required to pay any class 1 national insurance on any termination payment.
Finally, the foreign service relief was abolished for all UK residents (other than seafarers). This came into effect from 13 September 2017 and applies to terminations made after this date.
Termination payments have become difficult to establish in terms of whether it falls within general earnings or if it can be subject to s 403 ITEPA 2003. The new rules bring in more of an employee’s termination payment within income tax and the national insurance regime.
Should you require any further information on the above, please contact 020 3815 8999 and ask to speak to Reshma Johar, Gabelle.