By Ola Sulaimon
AT times, some business owners have to make hard decision to say goodbye to their very hard-working employees (or not so hardworking ones).This is a very difficult time for both parties and getting the termination payment right is very important.
This month I want to highlight the changes that the HMRC plans to put in place from April 2018 to ensure that when employees have to say goodbye to your business, their final payment is adequately taxed.
Termination payment is usually fully taxed when it is a reward for service performed, contractual or expected from the employer. However, termination payment such as compensation for loss of office and redundancy payment also referred to as ex-gratia is only taxable to the extent that they exceed £30,000.
Payment in lieu of notice (PILON) and garden leave are only taxable if they are contractual, are made in return for a breach in the contract and it would just be taxable to the extent that exceeds £30,000.
Some termination payment is fully exempt if they are made as a result of death or disability, or it's a payment made into a registered pension scheme and pays made in respect of employment with foreign service.
The changes expected are:
* Foreign Service element - From 6 April 2018, Foreign Service relief will no longer be available for an employee who resides and works in the UK before termination. The new rule would apply if the termination date is on or after 6 April 2018 and any payment made after 13 September 2017. However, some employers will still be entitled to foreign service where they met some exemption.
* Introduction of post-employment notice pay (PENP) - the purpose for this PENP is to exclude any amount from the £30,000 termination payment that relates to employment therefore taxed and national insurance paid.
The aim is to ensure that payment in lieu of notice is subject to tax irrespective of whether payment is contractual or compensation for an employer not given proper notice before termination.
They have achieved this by stating that when post-employment income is equal or greater the termination payment, the whole amount becomes general earning therefore fully taxable.
* Introduction of a new Class 1A national insurance from April 2019, employers would have to pay Class1A at 13.8 per cent on non-contractual payments that exceed £30,000.
To find out more, contact Ronzl Accountants Ltd, 51 Billing Road, Northampton on 01604 965826 or see the website at www.ronzlaccountants.co.uk