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Are you up to date with HMRC’s new PENP rule?

Watching headlines unfold that companies like Rolls Royce are making 4,600 people redundant is always a sobering experience. Restructuring the business is sometimes the only way to continue regrettably resulting in the loss of employees through redundancies.  That’s why this week I’ve decided to discuss the new tax rules regarding terminating employment by making people redundant.

If you  under threat of redundancy or in the difficult position of making people redundant this short introduction to new tax rules on redundancy will guide you.

An overview of the new PENP rule

The tax complications associated with redundancy have an added layer of complication with new Post Employment Notice Pay (PENP) rules. The rules came into force from 6th of April 2018.

What is the new tax rule?

Payment in Lieu of Notice (PILON) was replaced with PENP. The fundamental change in redundancy tax rules is PENP is potentially subject to income tax and National Insurance (NIC) regardless of an employee’s contract. Previously, taxability depended on a PILON clause being explicitly written into an employee contract.

An employee can receive up to £30,000 in redundancy pay tax free. If however, an additional payment is then made for say loss of office the employer then has to calculate what the salary would be for the notice period if it was worked and that amount  is now liable to income tax and National Insurance (NIC). So if the additional payment was £10K and the salary for the notice period not being worked were to be say £6K then £6K is now liable to Income Tax and NIC and the £4K can potentially fall into the £30K exemption for income tax and NIC assuming any redundancy element has not exhausted the limit.

Conversely if the payment is only £6K then it is all liable to income tax and NIC and none of the £30K exemption can apply.

From the 6th of April 2018 the terms of the employees’ contracts are no longer taken into account. Instead, all payments in lieu of notice, whether in a contract or not, are subject to the new rules. Instead the employer now has to split any payment into two being what the salary for the notice period not being worked is and anything else.

How do new rules impact a notice period?

If an employee was made redundant before 5th of April 2018 but is currently working the notice period the PILON rules before 6th of April apply. However, any employee made redundant from 6th of April 2018 is treated under the new rules.

What has changed?

One fundamental difference between PILON & PENP is that PENP is based on the basic salary.  The new rules are not taking into account any salary sacrifice schemes which were taken into account under PILON.

How is PENP calculated?

Under the new tax rules income tax and national insurance contributions (NICs) must be paid on all payments in lieu of notice (PILONs) on termination of employment caught by the PENP rules and outwith the £30K exemption.

What is excluded from basic pay rules?

  • Allowances
  • Awards
  • Benefits
  • Bonuses
  • Commission
  • Share options

TAX TIP! Be mindful if an employee pays into a salary sacrifice scheme it is the pre-sacrifice salary that you take into account.

Ask the expert

Every company, stable or not, should be actively reviewing their redundancy policy in line with PENP. It seems that what was to  simplify the process and to put everyone on the same footing has further complicated a complex area.

If you are looking for expert tax advice get in touch today by calling Bruce on 0141 290 0262  or email

All the best

Bruce Wilson, Director

 

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