The actual cost to the business of termination payments is often overlooked.

The unfortunate need for many businesses to focus on potentially downsizing their workforce has become increasingly necessary over the last 2 years. This trend, combined with the need to manage specific individuals out of the business and spurious claims from certain employees often result in HR departments taking a reactive approach to settlements and compensation payments made.

Whilst not immediately obvious, the differing tax and NIC treatment of termination payments through redundancy, termination or early retirement/ill health vary considerably. Importantly, the fact that the actual cost to the business of termination payments increases where tax and NIC is due is often overlooked. Not only are the costs of payments increased by 13.8% in employer's NIC but employers often only discover errors in payments during an HMRC PAYE audit often after the event. The resulting failure to operate PAYE on payments and making good the tax deductions and NIC due creates significant liabilities which could otherwise be resolved.

The £30,000 tax-free myth

Too many employers are still under the impression that the first £30,000 of any payment is free of tax and NIC. In short, the £30,000 exemption only applies to payments which fall to be taxed under Section 401 ITEPA 2003 – all aspects of the termination payment need to be initially analysed to determine which part of the legislation the payments fall under.

Pay In Lieu of Notice (PILONs)

PILONs have been the focus of much interest from HMRC in recent years and as such it is now more than likely that any PILONs paid will fall to be charged to tax and NIC in full. That said, there are numerous examples whereby PILON can still be paid free of tax and NIC so advice should be sought.

Compromise agreements

The days of being able to "tear up" an employment contract and replace with a compensation figure agreed through a compromise agreement are long gone. Even where a single compensation payment is agreed with the employee, HMRC are able to go back and determine what the tax and NIC position would have been if the contract had been fulfilled.

Why Cobia?

A proactive approach to termination payments can ensure that employers not only avoid potentially high claims for unpaid tax and NIC in the future, but reduce the overall costs of termination payments when made. Our team include former HMRC personnel who can provide straight forward, practical advice to implement and ensure any opportunities are identified at an early stage.

For further information please contact the Cobia team on 0845 226 0580 or email info@cobia-uk.com