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09 May 2018
Her Majesty's Revenue and Customs (HMRC) has published guidance on the new rules that require income tax and national insurance contributions (NICs) to be paid on all payments in lieu of notice (PILONS) from April 6 2018.
While the guidance had been eagerly awaited, given the uncertainty over how the rules will operate in practice, a number of questions remain unanswered (for further details, please see "New tax rules for payments in lieu of notice"). In addition, HMRC's approach to allowances is likely to increase substantially the amount subject to income tax and NICs in situations where the employee receives standard allowances (eg, car allowance).
In light of the new guidance, this update provides an overview of:
Where an employee's employment terminates after April 5 2018 and he or she receives a payment after that date, the basic salary that the employee would have received for any period of unworked notice is subject to income tax and NICs in full. This is irrespective of whether the contact contains a PILON clause.
Under the new rules, if an employee is paid in lieu of some or all of his or her notice period, the employer must deduct income tax and employee NICs from, and pay employer NICs on, the employee's post-employment notice pay (PENP).
PENP is generally calculated using the formula ((BP x D)/P) - T, where:
A simplified formula can be used where:
In this situation, 'D' is the number of whole months in the post-employment notice period and 'P' is one day.
Basic pay excludes:
However, if the employee participates in a salary sacrifice arrangement, the pre-sacrifice salary must be used for the calculation.
HMRC guidance states that an 'allowance' is a supplementary payment received by an employee over and above his or her standard pay; however, it does not include "any amount which is actually, or in reality reflects an amount which has been, consolidated into an employee's standard pay". This suggests that standard allowances such as car allowances or allowances in lieu of pension contributions should be included in the calculation of basic pay. This is likely to increase substantially the amount of PENP (in comparison to any contractual PILON) for employees in receipt of these types of allowance.
The 'post-employment notice period' is the period from the end of the day on which the employee's employment terminates to the earliest date on which the employer could have lawfully terminated the employment.
There are separate rules for fixed-term contracts where the contract does not include a requirement for notice to be given by either the employee or the employer. In broad terms, the basic pay that the employee would have received in the period beginning on the day after the employment terminated and ending on the date on which the limiting event occured is subject to income tax and NICs in full. The 'limiting event' is:
An employer must deduct PENP from the employee's relevant termination award. This is any payment or benefit which compensates the individual for the termination of his or her employment (ie, those payments and benefits which before April 6 2018 would have qualified for the £30,000 tax exemption), excluding any statutory redundancy pay.
PENP is subject to income tax and NICs in full.
Any statutory redundancy payment and the balance of the relevant termination award benefit from the £30,000 tax exemption and NICs exemption. If the relevant termination award is less than the PENP, the entire relevant termination award is subject to income tax and NICs.
The new rules have the following implications:
The PENP is likely to be zero if:
The PENP is likely to be zero if:
From April 6 2018, there is no tax disadvantage in having a PILON clause for basic salary in the contract.
It is uncertain how the new rules will apply in a number of situations and employers should seek specific advice regarding the following:
Further guidance on the practical operation of these new rules would be helpful for employers grappling with their implementation, particularly given the areas of continuing uncertainty, but HMRC has given no indication that further guidance will be forthcoming.
For further information on this topic please contact Victoria Goode at Lewis Silkin by telephone (+44 20 7074 8000) or email (firstname.lastname@example.org). The Lewis Silkin website can be accessed at www.lewissilkin.com.
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