Changes to tax treatment of termination payments
The government has published draft clauses for insertion into a new Finance Bill 2020-21, to be introduced into Parliament in the Autumn. These include changes which will affect employers who make termination payments.
The part of a termination payment which is treated as being a payment in respect of the employee’s notice period and subject to income tax and NICs is called the “post-employment notice pay” (PENP). The provisions will provide an alternative PENP calculation where an employee’s pay period is defined in months, but their contractual notice period is defined in weeks or days, or where the post-employment notice period is not a whole number of months. This will ensure that all employees’ PENP is calculated consistently on the termination of their employment.
The provisions will also bring PENP within the charge to UK tax for individuals who are non-resident in the year of termination of their UK employment.
The measures will take effect from 6 April 2021 and will apply to those employees who both have their employment terminated and receive a termination payment on or after 6 April 2021. Since October 2019, HMRC has, in any event, exercised managerial discretion to provide for an alternative calculation for PENP for use where it’s advantageous to the employee and this will continue to apply until 6 April 2021.