Skip to content

Brought to you by

Dentons logo in black and white

UK People Reward and Mobility Hub

The latest updates in employment, benefits, pensions and immigration

open menu close menu

UK People Reward and Mobility Hub

  • Home
  • Events and training
  • Who We Are
    • Meet the team
  • How we can help

HMRC changes to taxation of termination payments

By Alison Weatherhead
March 12, 2020
  • Legislative changes
  • Tax
  • Termination
Share on Facebook Share on Twitter Share via email Share on LinkedIn

Remember, remember the upcoming change to national insurance contributions (NICs) on termination payments – as well as the recent change to guidance on post-employment notice pay (PENP).

Termination Payments and Employer NICCs

On 6 April 2020, the Social Security (Contributions) (Amendments) (No. X) Regulations 2020 (the Regulations) are due to come into effect. The Regulations will impact on the tax treatment of termination payments.

What does this mean for the payment of termination awards?

The general rule has been that termination payments of up to £30,000 can be made to employees tax-free. Any remaining balance is then subject to income tax but not to employee or employer National Insurance Contributions (NICs). This position will change under the Regulations.

The Regulations are intended to align employer NICs with the income tax treatment of termination awards. This will mean that insofar as a termination payment exceeds the £30,000 threshold it will be subject to employer NICs.

Termination awards will remain exempt from employee NICs if they qualify for the tax exemption on the first £30,000.

PENP Concession

HMRC has provided an alternative formula for calculating PENP where an employee is paid monthly but the notice period is not a whole number of months (e.g. 30 days, 4 weeks, etc.). In these circumstances, and depending on which month notice is served, the standard PENP calculation can produce different results. For example, if the last pay period is in June applying the standard calculation will produce a higher PENP than if the pay period fell in December.

HMRC have, therefore, produced an alternative calculation which allows an employer to use 30.42 as the number of days in the pay period pay as long as this is beneficial to the employee.

Share on Facebook Share on Twitter Share via email Share on LinkedIn
Subscribe and stay updated
Receive our latest blog posts by email.
Stay in Touch
Alison Weatherhead

About Alison Weatherhead

Alison supports and advises clients on the full range of human resource queries and acts for clients in employment tribunals and judicial mediations, predominantly for employers. Her experience in tribunals includes advising on unfair dismissal, disability discrimination claims, whistleblowing claims and unlawful deductions from wages.

All posts Full bio

You might also like...

  • Disability
  • Employment status
  • Equal pay
  • Ethnic pay gap reporting
  • Flexible working
  • Grievance and disciplinary
  • Health and safety
  • Industrial action
  • Internships
  • Legislation
  • Legislative changes
  • Proposed legislative changes
  • Self-employed
  • Trade unions
  • TUPE/outsourcing

Beyond the Employment Rights Bill: what comes next?

By Laura Morrison and Lisa Watson
  • Disability
  • Employment policies
  • Flexible working
  • Legislative changes

Government response to the Work and Pensions Committee report

By Mark Hamilton
  • Employee benefits
  • Employee welfare
  • Employment policies
  • General
  • Legislation
  • Legislative changes

Statutory benefit payment increases come into effect from April 2023

By Christopher Seymour

About Dentons

Redefining possibilities. Together, everywhere. For more information visit dentons.com

Grow, Protect, Operate, Finance. Dentons, the law firm of the future is here. Copyright 2023 Dentons. Dentons is a global legal practice providing client services worldwide through its member firms and affiliates. Please see dentons.com for Legal notices.

Categories

Dentons logo in black and white

© 2025 Dentons

  • Legal notices
  • Privacy policy
  • Terms of use
  • Cookies on this site