When two Spurs players, Peter Crouch and Wilson Palacios, were transferred to Stoke they were paid a termination payment of over £1m by Spurs for terminating their contracts early.

This was treated as a termination payment on which no National Insurance Contributions (NIC) were due. Tax was due on all but the first £30,000. HMRC disagreed and tried to assess NIC. They appealed to a Tax tribunal where HMRC lost and subsequently lost the appeal.

At Budget 2016, the government announced that from April 2018, it will tighten the scope of the exemption to prevent manipulation and align the rules so employer NICs are due on those payments above £30,000 which are already subject to Income Tax.

The government held a technical consultation on the draft Income Tax legislation from 9 August 2016 to 4 October 2016. Following that consultation, the government made a number of changes to the proposals to make the rules easier for employers to operate. These changes include requiring the employer to calculate post-employment notice pay on the basis of basic pay only, and removing the requirement to calculate an employee’s expected bonus income and treat that as earnings.

HMRC will get the last laugh as the legislation changes in their favour on 6th April 2018 – a case of moving the goalposts maybe!

On 9th November 2017 HMRC published an update:

“This tax information and impact note aligns the rules for tax and employer National Insurance contributions by making employer NICs payable on termination payments above £30,000.”

Proposed revisions

Legislation will be introduced in Finance Bill 2017 to amend Chapter 3, Part 6 of ITEPA2003. The key changes to create the concept of post-employment notice pay are achieved by inserting a number of new sections.

The legislation splits an employee’s termination payment into two types of payment: payments that can still benefit from the £30,000 threshold and those that cannot. The legislation works by first identifying any payments that should be treated as earnings and any remainder is then subject to the £30,000 exemption.

The legislation ensures that statutory redundancy is exempt from Income Tax and NICs.

Foreign service relief is removed through amendment to sections 413 and 414 of ITEPA. It is retained for seafarers.

A new power to vary the threshold upwards or downwards is also provided.

The employer NICs charge on termination payments over £30,000 is achieved through amendment to section 10 of the Social Security Contributions and Benefits Act 1992. The amendment specifies that a Class 1A charge will apply to termination payments that count as employment income under section 403 ITEPA, provided the earner also pays Income Tax on that termination payment.

This legislation does not set out the way that the Class 1A charge will be collected as this will be covered in secondary legislation in due course. It is anticipated that this Class 1A charge will arise and be paid in ‘real-time’, rather than after the end of the tax year, as with other Class 1A charges.

Thanks to David Powell, Managing Partner at Booth Ainsworth, for providing his Expert Opinion on what can be a very complicated process.

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