The tax treatment of termination payments changed significantly for employment contracts ending on or after 6 April 2018, as we outlined in our newsletter on 15 March 2018. Only payments and benefits received on or after 6 April 2018 are affected, and statutory redundancy pay is excluded.
The new technical guidance is found in HMRC’s Employment Income Manual (EIM). There are two new terms to get your head around: RTA and PENP.
The relevant termination award (RTA) is the total value of the termination award and is divided into two elements:
1) Post employment notice pay (PENP), which is excluded from ITEPA 2003, s 403, and is taxable as general earnings.
2) RTA which is subject to ITEPA 2003, s 403, and is potentially tax free.
The amount of 2) is the total RTA after PENP has been deducted.
The PENP must be calculated using a formula in all cases, see example in EIM13880. It needs to be computed whether there is a contractual or non-contractual PILON, and even where the employee is dismissed with no notice at all. Any salary sacrifice scheme in place may increase the amount of the PENP. All salary sacrifice schemes must be included, there are no exceptions.
The amount which does fall under ITEPA 2003, s 403 is potentially tax free if it lies within the £30,000 threshold, any excess will generally be taxable.
These new tax rules are certainly not simple to apply, so please contact our office if you need advice.
Written by the Tax Advice Network