The Government has published the draft Finance Act 2021 which sets out a new formula for calculating post-employment notice pay.
The new calculation is applicable where an employee's pay period is defined in months but their unexpired period of notice is not a whole number of months.
At present, in this situation, the basic/general formula applies. The basic/general formula, however, can produce different outcomes depending on when in the year the employee's employment is terminated. This is because the formula uses the number of days in the pay period (ie. the month), 'P', as one of the inputs - and this can vary from 28 to 31.
The new formula removes this unintended outcome. Rather than using the number of days in the pay period as 'P', the new formula uses 30.42 instead, being the mean average number of days in a month.
Since October 2019, HMRC has permitted the use of 30.42 as 'P' on a discretionary basis where doing so benefits the employee. The new formula shall apply from 6 April 2021 and the current approach shall remain in place until then.
Originally published 31 july 2020.
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