Change to tax on termination payments

Published on 20 January 2020

Changes regarding the tax paid on termination payments come into effect on 6 April 2020.

What is happening?

Tax on termination payments is changing so that employer National Insurance Contributions (NICs) at 13.8% will be payable on any part of a payment that is subject to income tax.

Why does it matter?

This change has been in the pipeline for some time. It was first expected to be introduced in April 2018, but was delayed until April 2019, and then delayed again until April 2020.
Termination payments are exempt from income tax up to £30,000. Before 6 April 2020, neither employee, nor employer NICs were payable on termination payments over that amount but this is set to change. 

The change will increase the cost of settlement payments for employers. This will likely impact more widely on negotiating termination payments, ultimately leading to lower amounts being agreed overall. This will especially impact retailers who have large workforces with dynamic headcounts.

All settlement payments will continue to remain exempt from employee NICs.

What action should you take?

1. Try to conclude any ongoing settlement payment negotiations before 6 April 2020.

2. Wherever possible, aim to keep settlement payment amounts below £30,000.

3. For larger settlement payments, factor in the 13.8% employer NICs contribution payable over £30,000 when deciding the total value you are prepared to pay.

4. Liaise with your HR team to discuss and implement your approach to dealing with the change.

If you would like any assistance, please contact Patrick Brodie or your usual RPC contact.


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