National Insurance contributions (Termination Awards and Sporting Testimonials) Act 2019
Updated 1 May 2019
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Background
The National Insurance contributions (Termination Awards and Sporting Testimonials) Act 2019 received Royal Assent on 24 July 2019.
The Act introduces an important simplification of the tax system that helps to more closely align the Income Tax and National Insurance contributions treatment of termination awards and sporting testimonials. Previously, the fact that termination awards and sporting testimonials were subject to different Income Tax and National Insurance contributions treatment created confusion.
These changes close a loophole in the tax system. The misalignment incentivised well advised employers to disguise final payments as compensatory termination payments that benefit from a National Insurance contributions exemption.
The government confirmed at Budget 2018 that these measures would take effect from 6 April 2020.
This Act introduces a new 13.8% Class 1A employer National Insurance contributions charge to any part of a termination award or payment from a sporting testimonial, that is already Income Tax liable.
Any income derived from termination awards or sporting testimonials will remain free from employee National Insurance contributions.
The rules for determining the Income Tax treatment of income from termination awards and sporting testimonials were legislated for in Finance (No .2) Act 2017 and Finance Act 2016, respectively.
More closely aligning the National Insurance contributions treatment of termination awards with the Income Tax treatment
A termination award is a payment received in connection with the termination of a person’s employment.
At Budget 2016, the government announced that it would reform the Income Tax and National Insurance contributions treatment of termination awards. Certain forms of termination awards were exempt from employee and employer National Insurance contributions and the first £30,000 was free from Income Tax.
The Act will align the employer National Insurance contributions treatment of termination awards in excess of £30,000, with the Income Tax treatment for such payments.
This Act does not affect the:
- Employee National Insurance contributions treatment of termination awards
- National Insurance contributions treatment of statutory redundancy pay and compensation
Termination awards will remain exempt from Employee National Insurance contributions. The £30,000 threshold ensures that:
- no statutory redundancy pay on its own will be affected
- compensation for injury suffered in the workplace will remain free from Income Tax and National Insurance contributions
The Income Tax changes were made in the Finance (No 2) Act 2017 and took effect from 6 April 2018.
More closely aligning the National Insurance contributions treatment of income from sporting testimonials with the Income Tax treatment
Sporting testimonials are a practice where a club establishes a testimonial committee to organise a sporting event, or a series of sporting events to honour a player for their service, usually upon retirement. The primary purpose of a sporting testimonial is to support sportspeople who may not have had time to build up retirement savings before they stop playing.
At Autumn Statement 2015, the government announced that it would reform the Income Tax and National Insurance contributions treatment of payments derived from sporting testimonials.
This Act therefore aligns the National Insurance contributions treatment of income from sporting testimonials with the tax treatment by:
- bringing payments from sporting testimonials that are non-contractual or non-customary and organised by an independent testimonial committee within the scope of Class 1A National Insurance contributions
- applying the existing £100,000 Income Tax exemption to the National Insurance contributions treatment
- ensuring the new National Insurance contributions threshold will apply to only one testimonial in a lifetime, which could come from one event or a series of events held over a 12 calendar month ‘testimonial year’
The Income Tax changes were made in the Finance Act 2016 and took effect from 6 April 2017.
Further information
National Insurance contributions (Termination Awards and Sporting Testimonials) Act
An Act to provide for Class 1A National Insurance contributions on certain termination awards; and to provide for the controller of a sporting testimonial to be the person liable to pay Class 1A National Insurance contributions on payments from money raised by the testimonial.
National Insurance (Termination Awards and Sporting Testimonials) Bill – Factsheet
This document sets out further detail on the changes being made by National Insurance Contributions (Termination Awards and Sporting Testimonials) legislation.
Income Tax and National Insurance contributions: treatment of termination payments
This tax information and impact note aligns the rules for tax and employer National Insurance contributions by making employer National Insurance contributions payable on termination payments above £30,000.
Income Tax: update to treatment of income from sporting testimonials
This tax information and impact note applies to employed sports persons who receive income from a sporting testimonial or a benefit match which is non-contractual or non-customary.