NIM02511 - Class 1 NICs: Earnings of employees and office holders: payments made on termination of employment: from 6 April 2018

An employment may end for many different reasons: dismissal, resignation, death, the end of a fixed term, retirement and so on.

When an employment comes to an end, an employee often receives a package that includes a variety of different elements. Examples include unpaid salary, damages, a payment in lieu of notice, a payment for a restrictive covenant, compensation for loss of office and the provision of a non-cash benefit after termination. The correct label is not always applied to each.

There is a logical sequence to follow when looking at a termination payment or benefit.

The first task is to identify each element within the package. For example, you may only know that £x has been paid and enquiries are needed to establish exactly what that £x has been paid for. Or it may be described as a redundancy payment but in fact includes some of the examples above. Payments and benefits may be paid under various legal obligations or may be ex-gratia.

Finding the facts may involve interviewing those involved as well as seeing all the documents and notes of meetings. EIM12810 explains how to proceed once those facts are clear.

For a list of common questions about termination payments and benefits, see EIM12830.

Section 5 of the Finance (No. 2) Act 2017 made changes to the taxation of termination awards for income tax purposes. It inserted new sections 402A to 402E into Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003). The effect of these new sections is that some payments that previously formed part of a termination award and were therefore not taxable until a £30,000 threshold was exceeded are now treated as general earnings. They are therefore now taxable with effect from 6 April 2018.

Sections 402B to 402E ITEPA 2003 set out calculations for working out which parts of the termination award should be treated as general earnings. In essence, all payments in lieu of notice (PILONs) become taxable as earnings and will not benefit from the £30,000 tax-free threshold. A PILON is a payment made when an individual is asked to leave their job immediately, without working a notice period.

With effect from 6 April 2018, The Social Security (Contributions) (Amendment No. 2) Regulations 2018 (SI 2018/257) mirrored the tax position around PILONs and applies a Class 1 NICs liability to termination payments that fall within new section 402B ITEPA 2003. Payments falling within section 402B ITEPA 2003 are now to be treated as earnings for Class 1 NICs purposes.