Termination Payments – Class 1A National Insurance Contributions
As businesses prepare to start ‘weaning’ themselves off the government’s furlough scheme it is expected that a wave of redundancies will be announced in the coming weeks. With redundancies, consideration is needed to any payments to be made and the correct treatment for tax and National Insurance Contributions (NIC) applied.
On redundancy an employer must pay statutory redundancy pay to employees who have worked for their employer for two years or more. Statutory redundancy pay levels are fixed by the government, based on government rules and this is the legal minimum that an employer can pay.
An employer can pay more than the statutory amount if they choose. They may have their own ‘enhanced’ redundancy pay scheme. A redundancy package can include other payments such as pay in lieu of notice, compensation for loss of office, ex-gratia, payment for restrictive covenant etc. Genuine redundancy payments must be identified separately from other payments made at the same time, such as a bonus payment or holiday pay which would be taxable as earnings. This can be a complex area; there have been a number of changes introduced and the position depends on the particular facts and so should be considered on a case by case basis. It is advisable for employers to take advice from a professional adviser.
One recent change effective from 6 April 2020 is in respect of a Class 1A NIC on Termination Awards. From this date a new Class 1A NIC liability is introduced on non-contractual “cash” (or cash equivalent) taxable termination awards over a £30,000 threshold, which have not already incurred a Class 1 NIC liability as earnings. The purpose is to bring closer alignment between income tax and NIC treatment of termination awards.
The new liability is chargeable on the employer and will be payable at the same rate that applies to existing Class 1A NIC liabilities on benefits in kind of (currently) 13.8%. However, unlike Class 1A NIC on benefits from 6 April 2020 these new Class 1A liabilities will be paid and reported through the PAYE/Real Time Information (RTI) process.
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