Changes were made to the taxation of termination payments in Finance (No.2) Act 2017, with effect from April 2018 including:
- the introduction of PENP to ensure that all contractual, customary and non-contractual payments in lieu of notice are considered and consistently subjected to tax and National Insurance contributions
- the removal of foreign service relief on termination payments to UK resident individuals (this measure did not apply to seafarers)
- clarification that the exemption for injury does not apply in cases of injured feelings
- alignment of the rules for income tax and National Insurance contributions so that employer’s National Insurance contributions (Class 1a) are be payable on qualifying termination payments above £30,000. This came into effect on 6th April 2020
The change from 6th April 2021
The key changes to the legislation is an alternative calculation for PENP at section 402D ITEPA 2003 for employees who have a pay period defined in months, but a contractual notice period defined in weeks or days, or where the post-employment notice period is not a whole number of months. This is to ensure that all employees’ PENP is calculated consistently on the termination of their employment.
The amendment to section 27 ITEPA 2003 will ensure that non-resident individuals are charged to UK tax and National Insurance contributions on PENP, to the extent that their period of notice would have been worked in the UK.