The rules on the calculation of income tax on termination payments are complex and care must be taken to ensure the correct treatment.
There are two changes to the treatment of termination payments that are due to come into effect from 6 April 2021, which employers need to be aware of and a reminder of which were highlighted in HMRC’s Employer Bulletin last month as below: -
In July, HMRC published draft legislation affecting Post-Employment Notice Pay (PENP). These changes are expected to take effect from 6 April 2021, pending Parliamentary approval.
The changes give an alternative PENP calculation where an employee’s pay period is defined in months, but their contractual notice period or post-employment notice period is not a whole number of months. From 6 April 2021, employers will need to use the alternative calculation for all employees who meet these criteria. Employers have had the option of using this calculation since October 2019, on an extra-statutory basis, but from April 2021 it will be required.
These changes also align the tax treatment of PENP for individuals who are non-resident in the year of termination of their UK employment with the treatment for all UK residents. From 6 April 2021 earnings that arise pursuant to PENP will be subject to Income Tax, Class 1 National Insurance contributions and PAYE for non-residents to the extent that they would have worked in the UK during the notice period.