The rules concerning the tax treatment of Notice Pay have changed. Don’t get caught out! Martin Bloom, Head of Employment Law at Hegarty Solicitors, outlines the changes to be aware of
One of the questions I am most often asked by employers is how to deal with an employee’s notice pay entitlement. This is straightforward enough when an employee works their notice – the notice pay is dealt with in the same way as their other wages or salary and will be subject to the usual deductions for tax and National Insurance contributions. But what about an employee who is not required to work their notice and instead will receive pay in lieu of notice? It has long been the case that where there is a contractual right enabling an employer to make a payment in lieu of notice, such a payment will be subject to deductions for both tax and National Insurance. If no such clause exists then it was permissible to make the payment without deductions.
However, changes were introduced by HMRC at the start of this financial year. With effect from 6th April all payments in lieu of notice applicable to the termination date of an employee’s employment on or after this date must be treated as earnings and will be subject to deductions for both tax and Class 1 National Insurance contributions. In addition all other termination payments in excess of £30,000 will be subject to Employer Class 1A National Insurance contributions.
The deductions apply to an employee’s basic pay. Basic pay is defined as employment income not taking into account payments such as overtime, bonuses, commission and benefits in kind. It is important to note that any pay in lieu of notice will be subject to deductions for tax and National Insurance even if they are stated to be included within the £30,000 ‘tax-free’ threshold payment. The rules also now state that an employee who is a UK taxpayer who works abroad will also now be subject to such deductions, thereby ending the old Foreign Service Relief provisions.
The new rules also make it clear that any payment made to a departing employee representing injury to feelings will also be subject to such deductions, except where the injury amounts to a psychiatric injury or any other recognised medical condition. It will now be even more important to ensure the correct tax deductions are made. HMRC can recover unpaid tax and National Insurance, as well as penalties and interest from employers. I would therefore urge all employers to take advice before discussing any such payments with a departing employee, particularly before any such payment is made.
Hegarty Solicitors To speak to Martin Bloom about any aspect of employment law call 01733 295632 or email