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New NIC treatment of termination payments

The National Insurance Contributions Bill was introduced into Parliament on 25 April 2019. The Bill contains provisions designed to align the income tax and national insurance contributions (NICs) treatment of termination awards and sporting testimonials, closing a loophole which currently allows effective tax planning. If enacted, the new rules are expected to take effect from April 2020.

HMRC believe that ‘the current misalignment incentivises well advised employers to disguise final payments as compensatory termination payments that benefit from a NICs exemption’. Consequently, the new provisions will affect businesses that structure termination payments to reduce the tax and NICs liability with effect from 6 April 2020.

Broadly, the Bill introduces a new 13.8% Class 1A Employer NICs 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 NICs.

Background

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 NIC treatment of termination awards. Currently, certain forms of termination awards are exempt from employee and employer NICs and the first £30,000 may be free from income tax.

The Bill will align the employer NIC treatment of termination awards in excess of £30,000, with the income tax treatment for such payments.

The provisions do not affect the:

– employee NIC treatment of termination awards
– NIC treatment of statutory redundancy pay and compensation

Termination awards will remain exempt from employee NICs. 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.

Further information on these changes can be found on the GOV.uk website here.

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