Termination Payments in relation to National Insurance from 6th April 2020

In the tax world, proposals often get made and legislation gets introduced and then gets deferred.  This was true with Making Tax Digital and many other high profile changes to the tax profile system including the Class 2 abolition.  However one piece of legislation has finally been enacted and will be introduced from 6^th April 2020.  This requires any termination payments in excess of £30,000 to be charged to National Insurance at 13.8%.  However, interestingly where excess payments are changed to PAYE – the NIC will be Class 1A and not Class 1.

Class 1A is usually paid in relation to benefits reported on the form P11D.

All contractual entitlements paid on departure or redundancy are now caught under the post-employment notice pay (PENP) provision which came into being April 2018.  This required that the first £30,000 will be tax free but thereafter the balance will be subject to PAYE and potentially if paid after the P45 has been issued, will be taxed at 40%.  Currently, no National Insurance is due on this payment.

So the new legislation will require the amount over £30,000 to be charged to Class 1A (employer only) NIC.  As mentioned above, this would normally be reported on a P11D form due and payable by 22nd  July after the end of the tax year.  However, HMRC are proposing that because termination payments are normally reported to an RTI payroll system, they expect that similar reporting can be done for National Insurance.  Therefore the Class 1A would be due alongside the normal PAYE and Class 1, by 22nd of the month following the date of payment.

In order to get this in-year Class 1A payment onto HMRC records, new legislation is being considered and obviously expected prior to the end of the tax year.

If you are considering making any redundancies in your business, then please call Lambert Chapman LLP to discuss how this new rules will impact you.