Termination Payments

Chancellor George Osborne has announced that from April 2018 termination payments over £30,000 will be subject to employer’s national insurance contributions, as well as Income Tax which is already payable. Under £30,000 will still be free of tax. He said in his speech that “the rules are complex and the exemptions incentivise employers to manipulate the rules, structuring arrangements to include payments that are ordinarily taxable such as notice and bonuses to minimise the tax and NICs due”.

For people who lose their job, payments up to £30,000 will remain tax-free and they will not need to pay National Insurance on any of the payment.

It appears that more complex proposals floated by HMRC in their recent consultation on this issue have not been taken further at this stage. But they are also planning further consulting on wider changes to the tax and NI treatment of termination payments including:

  • taxing Payments In Lieu of Notice (PILONs) irrespective of whether they are contractual in nature or not; and,
  • bringing in new rules to prevent contractual termination payments being “disguised” as damages in order to avoid tax and NI on them.

These changes will be an additional cost to employers – potentially making termination settlements much more expensive in the future. It is worth noting that had the £30,000 exemption kept pace with earnings, it would now be over £72,000 but the amount has remained static for a very long time.

In two years time employers are less likely to be generous in what they are prepared to offer to staff in termination situations, as they look for ways to absorb the additional costs that the change will bring. As we get closer to the 2018 implementation date, some employers who are planning to restructure their workforce are likely to look to push their plans forward sooner than they might otherwise have done, to avoid the national insurance charge.

Employers and employees may also be disappointed that an opportunity for simplification has been missed.

Salary Sacrifice

The Government is also considering limiting the range of benefits that attract income tax and NICs advantages when they are provided as part of salary sacrifice schemes, although the Treasury makes clear that pension saving, childcare and health-related benefits such as Cycle to Work will continue to benefit from income tax and NICs relief, when provided through salary sacrifice arrangements.

Minimum Wage 2016

The standard rate of the national minimum wage for 21 to 24 year-olds will increase by 3.7% to £6.95 per hour, from October 2016, based on recommendations for the new rates from the Low Pay Commission.

Workers aged between 18 and 20 will see their pay rates rise by 4.7% to £5.55 per hour. The minimum wage for 16 to 17 year-olds increases to £4.00 per hour, a rise of 3.4%, while the apprentice rate increases 3% to £3.40.

The Government said the increase will mean that, for the first time, the national minimum wage for 21- to 24-year-olds is restored to its highest level in real terms, above its previous peak before the recession.

The National Living Wage, the minimum wage rate for workers aged 25 and over, will be effective on 1 April 2016.

Commentary

The challenge for employers is keeping up with pay, whilst juggling a number of other employment-related costs. It is increasingly difficult to disentangle rises to the national minimum wage rates with other business costs such as the new apprenticeship levy, and pensions auto-enrolment. Necessary actions for employers are:

  • From 2018 termination payments over £30,000 will need to add NI contribution to the calculations to establish the true cost.
  • Review whether salary sacrifice is really a good long term option.
  • Plan for the further changes to the NMW to ensure they do not mismanage the increases due in October this year.

The guidance provided in this article is just that – guidance. Before taking any action make sure that you know what you are doing, or call us for specific advice.