Employer National Insurance Contributions charge on termination payments from April 2020

Many businesses may be contemplating making employees redundant in the wake of the economic damage caused by COVID-19. Employers should bear in mind that they will be liable to pay employers’ national insurance contributions (NICs) at 13.8% on any payment made on or after 6 April 2020 to compensate the employee for the termination of their employment if, and to the extent that, the payment exceeds £30,000.

This new charge will not apply if either:

• The employment terminated prior to 6 April 2020; or 
• The termination payment is being paid in instalments with the first instalment being paid prior to 6 April 2020. 

This means that an employer who is currently negotiating a large termination payment can potentially make a significant employer’s NICs saving by timing either termination or the first instalment payment to happen before 6 April.

This does not affect the income tax or employee NICs treatment of termination payments. For example, if an employee’s employment terminates on 24 April and the employer makes a lump sum termination payment of £35,000 which qualifies for the £30,000 tax exemption, the employee will pay income tax on £5,000 but will not pay any employee NICs. The employer will pay Class 1A NICs via the payroll on £5,000. 

This is the latest change in a series of changes to the tax treatment of termination payments (see in particular our inbrief on changes to payments in lieu of notice which took effect in April 2018).