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Termination awards

From 6 April 2020, HMRC are introducing new rules around termination awards and sporting testimonials.

You can find detailed information on the government website

What's changing

From 6 April 2020, employers must pay Class 1A employer National Insurance contributions on any part of a termination payment over £30,000.

Previously, employers paying termination payments over £30,000 were only subject to tax, not National Insurance.

Income from termination awards will remain free from employee National Insurance contributions.

What does this mean?

If you're paying an employee a termination payment below £30,000, nothing changes.

If you're paying an employee a termination payment above £30,000, you will pay income tax and 13.8% Class 1A employer National Insurance contributions on any amount above the £30,000 threshold.

For example:

  • You pay a termination award of £40,000.
  • £10,000 is above the threshold.
  • You would pay income tax and £1,380 Class 1A employer National Insurance contributions.

What do I need to do?

 

Termination awards above the £30,000 threshold must be processed differently to smaller termination payments.

Any amount below £30,000 is processed in the same way. Only the amount above the threshold has to be processed separately.

For example, when processing a termination award for £40,000, the first £30,000 is processed as an award below £30,000 and the final £10,000 is processed as an award above the threshold.

To add a termination award below £30,000

  1. From within a Pay Run, go to Pay.
  2. Select the employee you want to pay the termination award, then click Add Payment, then Add a new payment.
  3. Enter the following details:

    Payment Category Expenses
    Payment Type Business Expenses
    Name Termination award
    Description Enter your description for the termination award
    Include in calculation of Depending on your employee's pension scheme, if required, select the Pension Earnings and Qualifying earnings check boxes.
  4. Enter the amount of the termination award.
  5. Complete the pay run as normal.

To add a termination award above £30,000

For the first £30,000 of the payment, follow the steps above. For the amount above £30,000 follow the steps below.

  1. From within a Pay Run, go to Pay.
  2. Select the employee you want to pay the termination award, then click Add Payment, then Add a new payment.
  3. Enter the following details:

    Payment Category Redundancy
    Payment Type Redundancy (Tax & NIC)
    Name Redundancy (Tax & NIC)
    Description Redundancy payment that is subject to PAYE and Class 1A NIC
    Include in calculation of Depending on your employee's pension scheme, if required, select the Pension Earnings and Qualifying earnings check boxes.
  4. Enter the amount of the termination award. This is the value above the £30,000 threshold, not the total value.
  5. Complete the pay run as normal.

    Class 1A National Insurance Contributions on termination awards are calculated, reported and paid as part of the existing PAYE cycle.

Reporting

You can see any figures relating to the Class 1A National Insurance Contributions on the Detailed Report for this pay run broken down by employee, and, the summary value on the P32 report under Employers NIC not eligible to be offset against EA.

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