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New rules for termination payments on or after 6 April 2018

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HMRC’s latest Employer Bulletin (February 2018) includes initial guidance on the changes to the taxation of termination payments introduced by Finance (No 2) Act 2017, s5.

Payments and benefits made in connection with termination of employment will be chargeable to income tax and Class 1 NICs as general earnings, and will not benefit from the £30,000 threshold, where they are received on or after 6 April 2018, in circumstances where the employment is also ended on or after 6 April 2018. The payments will be split into two elements:

  • post-employment notice pay (PENP), representing basic pay the employee will not receive because their employment was terminated without full or proper notice being given, is taxable as general earnings; and
  • the remaining balance of the termination payment, taxable as specific employment income to the extent that it exceeds £30,000.

PENP is calculated by applying a formula set out in the legislation to the total amount of relevant termination payments or benefits.

HMRC will publish detailed guidance on the application of the PENP formula in the Employment Income manual in due course.