Currently, termination payments over £30,000 are subject to income tax but not National Insurance Contributions. It was announced at the March Budget 2016 that, from April 2018, termination payments over £30,000 will be subject to employer NICs. However the Government has announced that this change will not now be introduced until April 2019.
Although the first £30,000 of a termination payment will remain exempt from income tax and NICs, from April 2019, termination payments over £30,000 will be subject to employer NICs. So, with employer NICs at 13.8%, this change will lead to increased costs for employers for large termination payments. It is anticipated that this tax will be collected in 'real-time', as part of the employer's standard weekly or monthly payroll returns and remittances to HMRC.
This announcement provides a temporary reprieve for employers from this additional cost. That said, as most termination payments fall below the £30,000 limit, this change will not impact on the majority of termination payments made.
There is however a significant change in the tax treatment of termination payments that will still be introduced in April 2018, when the current distinction between the different types of payments in lieu of notice will be removed. So from April 2018, all pay in lieu of notice payments will be treated as taxable earnings and will be both taxable and subject to Class 1 NICs.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
