By Cathy Walker, Assistant Manager, Payroll at Grant Thornton
A valid termination award is the simple end-goal for the employer. Revisiting compliance, after the employee has left, is not a welcome concept and will not prevent unforeseen tax liabilities falling into the laps of a well-meaning employer.
While indemnities within termination contracts provide some measure of protection, the practical reality is that employers must settle any unexpected liability regardless as to whether they can enforce such clauses and seek reimbursement from a former employee.
Often £30,000 is treated by some as an automatic tax free sum paid to an employee on the termination of their employment. However, recent and future changes to, what are already complex rules, should highlight the need to seek proper advice.
An employer will often seek legal advice on terminating a contract and alongside this should be a tax-led review on the income tax and NIC treatment of the payments being considered. Ideally, both reviews would happen before package or compromise agreement is presented to an employee.
Every business needs to be aware of new rules coming into force in April 2020. Broadly, the 2020 regulation will apply Employer National Insurance Contributions (‘NIC’) (currently 13.8%) to any award in excess of the £30k threshold. HM Treasury consider that this will only affect around 20% of termination awards each year. A payment to an employee, solely relating to their contract terminating, will continue to have an exemption from employee NIC.
Liabilities arising in connection with termination payments are collected and paid in ‘real time’ as part of normal payroll operations. Statutory and enhanced Redundancy Pay up to £30,000 continues to be exempt from Income Tax and National Insurance. More information will be required by whoever is processing payroll; they will need the elements split out either side of the threshold to identify legitimate termination pay separately from items such as residual holiday pay and payments in lieu of notice.
Terminating employment is never easy, and employers want to be sure they are not only treating the employee properly, but also that the process is correct. Government is trying to provide support to those who lose their jobs, and to simplify the process for the employee and employer. In doing so, they must seek to strike a balance between support and identifying a small minority who might try to take advantage and disguise regular contractual payments as termination pay.