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10 July 2018

New rules for tax and NIC on termination payments from April 2018

The so called ‘abuse’ of the tax and NIC exemptions relating to ex gratia termination payments by employers has been a hot topic for HMRC for some time now.

Let’s start with a bit of background. If someone leaves and you decide to pay them a sum of money as a thank you for their work that they are not contractually entitled to (referred to as ‘ex gratia’), and which has not become customary for others that leave your employment then the first £30,000 was exempt from tax, with the whole amount exempt from NIC for both employer and employee.

However, HMRC have raised concerns that these rules are being abused, with employers trying to treat all final payments to departing employees as being ‘ex gratia’ so that they save Employers NIC, while the employee also benefits from the tax and NIC exemptions.

From April 2018 the new rules ensure that any part of a departing employee’s termination payment that relates to pay in lieu of notice (as per their contract of employment or their statutory entitlement, whichever is the greater) is subject to tax and NIC.

Similarly, other sums that the employee is entitled to under their contract of employment, or by law (with the exception of statutory redundancy – see below), are also subject to tax and NIC in full.

This means that only true ex gratia sums that the employer chooses to pay the employee over and above the sums that they are entitled to benefit from the tax and NIC exemptions. The only exception to this rule is statutory redundancy which also enjoys the tax and NIC exemptions.

So what else has changed? As mentioned above, prior to April 2018 the first £30,000 of ex gratia termination payments was exempt from tax, with the whole amount exempt from NIC for both employer and employee. However, while the £30,000 exemption remains for tax and the employee is still exempt from NIC on the whole ex gratia sum, the employer is now liable for Employer’s NIC on any sums in excess of £30,000.

For further advice on this matter please contact me.

 

Key Facts:

  1. New rules apply to employment termination payments from April 2018
  2. Any sums due under an employment contract or by law are subject to tax/NIC
  3. Statutory redundancy payments still enjoy tax and NIC exemptions
  4. The £30,000 tax exemption for genuine ex gratia sums (and statutory redundancy) remains
  5. Ex gratia sums are still NIC exempt for employees but employers face NIC on sums > £30,000

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