Month: December 2018

On 6 April 2019 the law relating to the taxation of termination payments will change. From that date, you’ll have to pay employers’ NI on any part of the payment that exceeds £30,000. What does this mean in practical terms?

PILON payments

Up until 5 April 2018 the tax rules stated that where an employer had a right or a discretion under the employment contract to make a payment in lieu of notice (PILON) on the termination of employment, the payment would be classed as normal earnings and subject to income tax and Class 1 NI in the usual way. These are payable by the employee but deducted by the employer.

£30,000 exemption removed

Where there was no PILON clause, or a discretion was not exercised, a termination payment was classed as damages, i.e. compensation, for the employer’s breach of contract. In this situation, the first £30,000 of the termination payment could be paid free of income tax and NI due to a statutory exemption. On 6 April 2018 the distinction was removed and all termination payments are subject to income tax and NI, no matter what the employment contract says.

The statutory formula

To work out the amount payable, you must calculate exactly how much of the PILON is post-employment notice pay (PENP). PENP is essentially the basic pay that an employee would have received for any unworked period of notice, minus any contractual PILON they are entitled to receive. Unfortunately, there’s a complicated statutory formula which must be used to calculate the actual PENP figure. You should calculate PENP for all employees whose employment is terminated, including those whose contracts contain an express PILON clause.

A nil PENP

Whilst you must make this calculation in every circumstance, the PENP will always be “nil” where an employee works out their full contractual notice period, i.e. they don’t leave, or are asked to leave, part-way through that notice period.

Tip. Where you need to calculate a PENP using the statutory formula, follow the guidance set out in HMRC’s manual (see The next step ).

More new rules

On 6 April 2019 there will be a further change to the taxation of termination payments (this change was originally due to take effect in 2018 but was delayed). From that date, you’ll also be required to pay employers’ NI on any part of a termination payment that exceeds £30,000. This exemption doesn’t relate to employees’ NI, so you’ll need to amend your payroll procedures accordingly.

Tip. The practical effect of this change is that a termination payment could cost you more overall because you’ll have to pay an additional 13.8% on the balance over £30,000. If you have any costly termination payments on the horizon, you can avoid this additional cost by concluding matters fully before 6 April 2019. Employment must also terminate before this date.

HMRC have published new advisory fuel rates for company car drivers which will apply from 1 December 2018.

The new rates will be:

You can continue to use the old rates up to 31 December 2018.

HMRC have published a new online form for companies and partnerships who wish to apply for a UK certificate of residence.

Certificates of residence are often needed to ensure that double tax relief or treaty relief is accepted by a country in respect of particular income or profits.

In some cases, a certificate or residence is required to avoid Withholding Tax.

HMRC have now issued a new online form, RES1, which can be used by companies, LLPs and partnerships, or their agents, to apply for a certificate of residence where proof of UK residency is required. In some cases the relevant double tax treaty may require that a letter is required rather than a form and additional conditions may apply. It will be necessary to check the requirements of the territory to which the certificate is to be provided.

To be able to complete the form you will need to have the following information:

• Address and UTR of partnership or company
• Reason for the certificate application
• Type of income the certificate is required for
• The period for which the certificate is required: this must be in the past
• The ‘other country’ that requires the certificate
• From the double tax treaty with that other country:
  • The article number dealing with the type of income
  • Whether the income must be subject to tax or liable to tax

In addition, if completing the form for a partnership you must have the following:

• Managing partner full name, address and UTR
• Title, full names and residency status of all partners

If completing the form for a company, you will need the company tax office ID, the UTR and, if this is for a new company before its first Corporation Tax return is submitted, you will need to explain why you believe the company is UK resident.

The partnership form should be sent to HM Revenue & Customs, PAYE & Self Assessment BX9 1AX.

The company form can be emailed to contactus.largebusinessscotlandandni@hmrc.gsi.gov.uk or posted to MUID 854, Large Business S0862, HM Revenue & Customs, Newcastle Upon Tyne, NE98 1ZZ.

The form can be found here.