As some predict, it is expected that a wave of redundancies may soon be announced. This can be a complex area and consideration is needed to any payments to be made and for the correct treatment for tax and National Insurance Contributions (NIC) to be applied.

On the occasion of redundancy an employer must pay statutory redundancy pay to employees who have worked for their employer for two years or more. Statutory redundancy pay levels are fixed by the government, based on government rules and this is the legal minimum that an employer can pay.

An employer can however pay more than the statutory amount if they so choose and they may have their own ‘enhanced’ redundancy pay scheme.

A redundancy package can include other payments such as pay in lieu of notice, compensation for loss of office, ex-gratia payment, payment for restrictive covenant etc. Genuine redundancy payments must be identified separately from other payments made at the same time, such as a bonus payment or holiday pay which would be taxable as earnings.

There have been a number of changes introduced, one change effective from 6 April 2020 is in respect of Class 1A NIC on Termination Awards. From this date a new Class 1A NIC liability was introduced on non-contractual “cash” (or cash equivalent) taxable termination awards over a £30,000 threshold, which have not already incurred a Class 1 NIC liability as earnings. The purpose being to bring closer alignment between income tax and NIC treatment of termination awards.

This liability is chargeable on the employer and will be payable at the same rate that applies to existing Class 1A NIC liabilities on benefits in kind of (currently) 13.8%. However, unlike Class 1A NIC on benefits this Class 1A liability is payable and reportable through the PAYE/Real Time Information process.

It is the responsibility of the employer/former employer to ensure the correct tax and NIC treatment of payments on termination of a contract of employment. This depends on a number of factors and should be considered on a case-by-case basis. It is therefore highly recommended that employers take professional advice when making such payments.

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