This change was originally planned for implementation in April 2018 but deferred until April 2020, the intention was for these new Class 1A NICs liabilities to be paid and reported at the time of payment rather than at the end of the tax year. To enable this HMRC have confirmed Real Time Information (RTI) payment and reporting provisions will be used. The delay in rolling out was due to the inability to obtain parliamentary approval. This will require some thought for payroll providers as these termination payments will be the only type of payments whereby there is company NI liability only.
HMRC have provided the below reasons for the change:
- The current rules for taxation of termination payments are complex and the exemptions incentivise employers to manipulate the rules by structuring arrangements to include payments that are ordinarily taxable to minimise the Income Tax and National Insurance Contributions (NICs) due.
- At Autumn Budget 2018, the government announced that from April 2020, it will tighten the scope of the termination payment exemptions to prevent manipulation and align the rules so employer NICs are due on those payments above £30,000 (which are already subject to Income Tax).
- The government held a technical consultation on the draft Income Tax legislation from 9 August 2016 to 4 October 2016. Following that consultation, the government made a number of changes to the proposals to make the rules easier for employers to operate.
- The existing £30,000 Income Tax exemption on termination payments will be retained and employees will continue to benefit from an unlimited employee NICs exemption for payments associated with the termination of employment. This will ensure that those who lose their job will be supported through the tax system.
- An employer will be required to pay Class 1A NICs on any part of a termination payment that exceeds the £30,000 threshold. This will be calculated and reported in ‘real-time’, as part of the employer’s standard weekly or monthly payroll returns and remittances to HMRC. Liability on non-cash elements will be declared and collected using the established End of Year P11D process.
- The measure confirms that all income from sporting testimonials and benefit matches for an employed sportsperson will be chargeable to income tax and employer NICs. This treatment will be subject to a ‘one-off’ (employee & employer) exemption of £100,000 of the income received from events held during a single testimonial or testimonial year. This will ensure that employed sportspersons on modest incomes who, for whatever reason, may be coming to or have already reached the end of their playing career are protected from these changes. Where there is a contractual entitlement or customary right to the sporting testimonial or benefit match then this exemption will not apply. The employer NICs liability will come into effect on 6th April 2020.
As always Expert Payroll Services have made the necessary arrangements to ensure this legislation is accommodated.