Termination payments and employer National Insurance
From 6 April 2020, employers will have to pay Class 1A National Insurance contributions on taxable termination payments in excess of the £30,000 tax-free limit. However, no contributions will be payable by employees; although employers and employees both pay Class 1 contributions on payments made on termination that count as earnings.
Earnings or a termination payment?
Payments made on the termination of an employment are taxed as earnings up to the amount that the employee would have been paid had they worked their notice period. Amounts in excess of this are treated as termination payments, the first £30,000 of which are tax-free. Some payments, such as redundancy pay, count towards the £30,000 threshold rather than being treated as earnings.
Class 1 National Insurance contributions are payable on payments of earnings by both the employer and the employee.
New Class 1A charge on taxable termination payments
Termination payments are taxable to the extent that they exceed the £30,000 threshold. From 6 April 2020, employers will also be required to pay Class 1A contributions on the taxable amount. Contributions will be payable at the rate of 13.8% to the extent that the payment exceeds £30,000.
No employee contributions
As the Class 1A charge is an employer-only charge, the position for employees is unchanged. Employees will pay tax on the excess over £30,000, but not National Insurance.
The systems for paying and reporting Class 1A National Insurance contributions on taxable termination payments is different to that for benefits in kind. Instead of including the termination payment in the calculation of the Class 1A liability on the P11D(b) after the year end, it must be reported to HMRC under real time information, as for Class 1 National Insurance and PAYE, for the tax month in which the termination payment was paid to the employee.
Payment to be made in-year
Unlike Class 1A National Insurance contributions on benefits in kind, which are due by 22 July after the end of the tax year where payment is made electronically (or 19 July where paid by cheque), Class 1A National Insurance contributions on taxable termination payments must be made in-year.
The Class 1A liability must be paid with the PAYE and Class 1 National Insurance for the tax month in which the payment was made; i.e. by 22nd of the month where payment is made electronically and by 19th of the month where payment is made by cheque.
Accelerate termination payments to avoid the charge
Where a termination is on the cards, terminating the employment prior to 6 April 2020 will save the Class 1A contributions. We can help you structure your termination payments and deal with the associated tax and National Insurance correctly.