NIM13202 - Class 1A NICs: liability for Class 1A NICs: Class 1A NICs on termination awards: benefit-in-kind received with termination award
When an employment comes to an end and a termination package is negotiated it is not uncommon for provision of a benefit-in-kind (BIK) to be included with the termination award. This will most normally be a company car but could be anything which qualifies as a benefit in kind – anything from an item of stationery to property.
Benefit is gifted as part of the termination package
If the employee is allowed to keep the benefit, then this is no longer a benefit, but a non-cash item received as part of the termination payment. The value of the item must be calculated and tax and Class 1A NICs paid on that amount as part of the termination award that exceeds the threshold of £30,000.
Example
Peter has lost his employment and as part of his severance package he has been allowed to keep the company car he has been using for the last 3 years.
The value of the car is £15,000 and this amount is added to the amount of the termination award that is subject to tax and Class 1A NICs.
Benefit is allowed to be used for a specific period of time before being returned
If the employee is allowed to use the benefit, then it is still classed as a benefit-in-kind for the period of time it is used until it is returned. The employer must account for the benefit through the existing P11D(b) process for each tax year it is in use. See NIM15000.
The Class 1A NICs paid in this scenario are paid after the end of the tax year along with all the other benefits of all the other employees.
No Class 1A NICs on termination awards (paid in real time) will be due on the value of the benefit but the £30,000 threshold applies to both cash and benefits.
Benefits provided post employment
Where a former employee is granted a benefit that covers services that span beyond the end of their employment for a period, such as an annual health check-up, these will need to be reported at the end of each tax year for which the former employee receives the benefit. The benefit should be reported using the P11D(B) process.
Hierarchy of payments applying to £30,000 exemption
There is a hierarchy of payments so that if the employee is given a cash payment in their testimonial and the provision of taxable BIK, both giving rise to a class 1A liability, apply the £30,000 threshold to the cash element first.
Example
If the employee receives £20,000 cash payment and BIK worth £20,000 then we set the £30,000 exemption against the cash element, leaving £10,000 exemption left to set against the BIK, whereby the actual amount then liable to Class 1A is £10,000 of the BIK.