The September 2017 Finance Bill contains two measures that will affect both employers and employees.
Originally announced in the 2016 Budget, the new rules will now come into force from 6 April 2018 and introduce a new concept of postemployment notice pay (PENP). This effectively excludes from the £30,000 exemption any amounts that would have been subject to PAYE and national insurance contributions (NICs), if the employment had continued. It will do away with the distinction between contractual and non-contractual payments in lieu of notice (PILONs), and may result in tax on payments of compensation for loss of office.
Also from 6 April 2018, all taxable termination payments will be subject to employer’s NICs. So in the example below, Stephanie’s employer will have to pay NICs on £16,000, whereas under present rules there is no NIC liability. Employers will need to factor in the additional cost when planning termination payments.
In addition, the foreign service relief for termination payments to internationally mobile employees will be abolished and replaced by a more limited exception in certain cases of non-UK employment.
Stephanie earns £64,000 and is entitled to three months’ notice. Her employment is terminated without notice and she is paid £25,000 compensation for loss of employment and £16,000 as a non-contractual sum in lieu of notice.
The PENP is £16,000 - the amount Stephanie would have earned if working the notice period.
So of the total payment of £41,000, £16,000 is taxable and £25,000 is covered by the £30,000 exemption. Under current rules, £11,000 would be taxable after deducting the £30,000 exemption from the whole payment.
Pension allowance cut
Another measure that has reappeared in the Finance Bill currently before Parliament is the reduction from £10,000 to £4,000 in the money purchase annual allowance (MPAA) for pension contributions. The normal annual allowance is £40,000. The MPAA is not triggered if the individual only draws the tax-free lump sum, or purchases an annuity.
The change affects individuals who flexibly access their pension benefits, but make further contributions to a money-purchase scheme. The reduction to the MPAA has been backdated to 6 April 2017, the original start date before it was dropped from Finance Act 2017.
If you have exceeded the £4,000 MPAA, you must report the excess on your tax return and it will be subject to tax.