25/07/2024Memery Crystal advises Intelligent Ultrasound Group plc on £40.5 million disposal
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05/04/2018
For employees terminated on and from 6 April 2018 who receive termination payments, employers must now split out termination payments between: (i) amounts to be treated as earnings (and so subject to tax and Class 1 NICs), and (ii) other amounts which benefit from the first £30,000 tax exemption.
There are three steps to follow:
1) Calculate the “termination award”
(Note that there will be no “termination award” where all an employee receives on termination is a payment pursuant to a contractual PILON clause. Such payments will continue to be treated as earnings, as per the pre-2018 regime. There is therefore no need to undertake this three-stage process in such circumstances)
2) Calculate the “post-employment notice pay” (PENP)
3) Compare the “termination award” with the PENP – what should be taxed?
By way of a simple example:
Employee A is made redundant. Their gross monthly basic pay is £5,000 per month.
They are entitled to 3 months’ notice and required to work one of these; the employer will make a lump sum payment for the remainder. There is no PILON in their contract.
They are also entitled to a statutory redundancy payment of £3,000 and the employer makes an ex-gratia payment of £7,000.
As complicated as this may appear, the above applies to relatively straightforward scenarios. Greater complexity can be expected in relation to “sacrificed salaries”, dismissals for gross misconduct, and instances where the contractual PILON payment constitutes only a part of the overall termination award.
It is anticipated that HMRC will provide guidance on this and more soon which will be updated here when available.
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