New rules to affect national insurance for termination payments

After being postponed for several years, the government have finally taken the decision to introduce new rules affecting national insurance contributions for termination payments. 

This will affect your business if from 6 April 2020 a termination payment is made to an employee.  The new rules bring national insurance into line with the tax treatment by introducing a new 13.8% class 1A employer national insurance charge. At the same time, new rules are being introduced for sporting testimonials.

Termination Awards and Payments in Lieu of Notice (PILONs)

By way of background, it is worth remembering that from 6 April 2018 the government changed the income tax rules on Payments in Lieu of Notice (PILONs).  Previously, a PILON was treated in the same way as other termination payments, which meant that they could be fully or partly covered by the £30,000 exemption. From 6 April 2018, the whole amount of all PILONS are taxable and subject to employee’s and employer’s NIC.

Other types of termination pay, such as redundancy payments, can still benefit from the £30,000 income tax exemption in certain cases. Income tax is then payable on the excess. Previously, national insurance was not payable on these amounts, but from 6 April 2020, Class 1A employer’s national insurance of 13.8% will be payable on the same amount as is charged to income tax. Employees will not be charged, however.

Care is still required as to whether the £30,000 exemption applies to other termination payments. It doesn’t by any means cover all payments, so please let us know if you are considering making such a payment.

Sporting Testimonials

The new rules applying from 6 April 2020 will create an employer’s national insurance charge of 13.8% on any part of a non-contractual or non-customary testimonial payment that exceeds the £100,000 threshold.