What you need to know about National Insurance changes

The National Insurance Contributions (Termination Awards and Sporting Testimonials) Act 2019 received Royal Assent in July 2019 and will take effect on 6th April 2020.

Here’s what you need to know and how it could impact you.

The legislation

The Act just covers the introduction of employer-only National Insurance (NI) on termination payments that exceed £30,000 and non-contractual/non-customary sporting testimonials that exceed £100,000.

If, for example, an employee receives a termination payment of £40,000 in April 2020, the employer will pay 13.8% employers’ NI on £10,000. Before then, there is a tax exemption of £30,000 which is subject to qualifying criteria, and a full employers’ and employees’ NI exemption on payments where the first £30,000 is tax free. In this example, where a £40,000 termination payment meets the qualifying criteria, currently £30,000 is tax free and £40,000 is NI-free.

The difference

So as not to be confused with the Class 1A employer-only charge on benefits in kind, this type of NI will be called ‘Class 1A in real-time’ as it will be calculated, reported and paid as part of the in-year payroll cycle.

The impact

Business tax accounts

These will be amended to display the Class 1A charge separately to the Class 1 liability. There is no requirement to pay the Class 1 separately nor to identify it with any separate reference number; it can be included in the single remittance paid each month.

Staggered termination payments

In instances where an employer makes two termination payments, one of which falls potentially after the date of leaving and after 5th April 2020, Class 1A will be due on any amounts exceeding £30,000 that are paid in the new tax year.

A new payroll record can be set up for this purpose or the old payroll record can be re-opened if software allows. P45s and P60s are not affected as they do not show employer-only amounts.

NI Year to Date

These are not earnings for Class 1 NI, and so the value of the termination payment will not be included in gross earnings for NI, either this period or year-to-date.

Apprenticeship levy and student loans

As these are subject to Class 1A NI rather than Class 1 earnings (which is what the apprenticeship levy and student loans are based on) these will not be impacted by the changes.

What you need to do

  • Check out what your payroll software provider will be offering to automate the calculation and pay over of this new in-year liability. Ensure there will be a clear distinction between Class 1 and Class 1A. Some commentators have wrongly been indicating this is an employer and employee liability – it isn’t and this is why it is called Class 1A. The synergy with Class 1 is that it is calculated and paid in-year
  • Ensure HR teams are aware of this change and factor it into any restructuring plans for the new year – it will be cheaper for terminations to take place in March than April!
  • Involve finance in the inclusion in nominal ledger interfaces and budgeting for this cost
  • Amend your internal leaver processes, HMRC remittance processes and reports to facilitate the correct pay over to HMRC