Termination payments and Class 1A National Insurance

Termination payments and Class 1A National Insurance

As the Coronavirus Job Retention Scheme comes to an end, employers with employees who are still on furlough will need to decide whether they are able to bring the employee back to work, either full time or part time, or whether they will have to terminate the employee’s employment.

When terminating an employee’s employment, the employer may need to pay Class 1A National Insurance contributions on a termination award made to the employee.

Taxation of termination payments: Recap

Where an employee’s employment is terminated, the employee may receive termination payments, such as pay in lieu of notice and ex-gratia lump sums, in additional to normal wages and salary payments.

Normal payments from the employment, such as salary and holiday pay, are taxed as earnings and are liable to employee’s and employer’s Class 1 National Insurance contributions. However, the treatment of termination payments depends on whether, and if so the extent, to which they exceed what is known as the employee’s ‘Post Employment Notice Pay’ (PENP). Detailed consideration of how this is determined is outside the scope of this article, but broadly, PENP is the amount that the employee would have earned had they worked their notice period.

PENP is taxed as earnings and is liable to employee’s and employer’s Class 1 National Insurance.

Where the employee’s termination payment exceeds their PENP, the first £30,000 of the excess is tax-free. Amounts over £30,000 are taxable but not liable to employee’s National Insurance.

Employer liability to Class 1A NIC

Where a termination payment exceeds the £30,000 threshold, since 6 April 2020, the employer must pay Class 1A National Insurance on the excess over £30,000 at 13.8%.

Unlike Class 1A National Insurance contributions on benefits-in-kind, the Class 1A payable on a termination payment is not included in the Class 1A liability reported on the P11D(b); instead it is reported to HMRC via Real Time Information (RTI) on the Full Payment Submission (FPS) for the period in which the termination payment was made to the employee.

The Class 1A National Insurance payable on the termination award must be paid over to HMRC with the tax and Class 1 National Insurance for that period, i.e. by 22^nd of the month where payment is made electronically or by the 19^th of the month where payment is made by cheque, rather than with the Class 1A on benefits in kind, which must be paid by 22 July after the end of the tax year where payment is made electronically (or by 19 July where payment is made by cheque).

Example

An employee has been on furlough since March 2020. In September 2021, his employer decides that they are unable to keep the employee on. The employee’s employment is terminated with effect from 1 October 2021.

The employee receives a termination payment of £100,000, paid to him on 1 October 2021. The employee’s PENP is £15,000. The excess over the PENP is £85,000 (£100,000 – £15,000), of which the first £30,000 is tax-free. The remaining £55,000 is taxable and liable to Class 1A National Insurance.

The employer’s Class 1A National Insurance liability is £7,590 (£55,000 @ 13.8%). The payment is made to the employee in month 6 (month to 5 October 2021). The employer’s Class 1A National Insurance on the termination payment must be paid to HMRC with the PAYE tax and Class 1 National Insurance for month 6. Payment must be made by 22 October 2021 where it is made electronically, or by 19 October 2021 if payment is made by cheque.

Employers terminating employees’ employments will need to budget for the Class 1A liability, as well as the cost of the termination packages.

Claim tax relief for additional costs of working from home

Claim tax relief for additional costs of working from home

During the Covid-19 pandemic, the advice was ‘work from home if you can’. As a result, millions of employees found themselves working at home, often at very short notice. Many still have not returned to the workplace, and homeworking (whether fully or flexibly) is here to stay.

Employees will generally incur additional costs as a result of working from home. They will use more electricity to run their computer and light their workspace and may use more gas as a result of having the heating on during the day.

While for many years there has been a statutory exemption that allows employers to meet or contribute towards the additional costs of working from home, in recognition of the homeworking requirements imposed by the pandemic, employees who do not receive homeworking payments from their employer are able to claim tax relief for the extra household costs that they have incurred while working from home.

Exemption for costs met by the employer

Employers can pay employees a homeworking allowance of £6 per week (£26 per month) tax-free, and without the employee having to demonstrate that they have actually incurred additional household costs of at least this amount as a result of working from home. The tax-free amount is the same, regardless of whether the employee is required to work from home full-time or one day a week. Consequently, the payments can be made to employees who work flexibly, working from home part of the time and at the employer’s workplace part of the time.

Where the employee’s actual additional household costs as a result of working from home are more than £6 per week, the employer can meet the actual costs tax-free, as long as the employee is able to provide evidence in support of the actual additional costs.

Tax relief for employees

Employees who have been required to work from home can claim tax relief for the additional costs of doing so where these are not met by the employer. HMRC will accept claims of £6 per week/£26 per month without needing evidence of the actual additional costs. Where these are higher, the higher amount can be claimed, as long as this can be substantiated.

HMRC are now accepting claims for 2021/22. Claims can be made online at www.tax.service.gov.uk/claim-tax-relief-expenses/only-claiming-working-from-home-tax-relief?_ga=2.193253997.1398232652.1624373729-980780301.1612354164.

Relief is given for the full tax year, even if the employee returns to the workplace before 5 April 2022. Employees who were entitled to the relief for 2020/21 can also claim for that year if they have not yet done so.

Where an employee is required to complete a self-assessment tax return, the claim can be made on the return.

A claim of £6 per week (£312 for the year) will save a basic rate taxpayer £62.40 in tax and a higher rate taxpayer £124.80 in tax.

Can you claim the Employment Allowance for 2021/22?

Can you claim the Employment Allowance for 2021/22?

The Employment Allowance is a National Insurance allowance that enables eligible employers to reduce their employers’ (secondary) Class 1 National Insurance bill by up to £4,000. However, not all employers can benefit – there are some important exclusions.

Eligible employers

To qualify for the Employment Allowance, the employer’s Class 1 National Insurance liabilities for 2020/21 must be less than £100,000. Where the employer is part of a group, the £100,000 limit applies to the group as a whole, not the individual group companies.

The Employment Allowance is not available to companies where the sole employee is also a director. This rules out most personal companies. However, family companies with more than one employee are able to claim.

There are other exclusions too, for example, employers who employ someone for personal, household and domestic work unless the worker is a care or support worker.

Amount of the allowance

The Employment Allowance is set at the lower of £4,000 and the employer’s secondary Class 1 National Insurance liability for the year. Once claimed it is set against the employer’s Class 1 liability until it is used up.

Example

A Ltd is eligible for the Employment Allowance. Its secondary Class 1 National Insurance liability is £1,500 a month. It claimed the Employment Allowance at the start of the 2021/22 tax year. The allowance is used as follows:

Month 1: £1,500 of the Employment Allowance is set against the liability for the month of £1,500, leaving nothing to pay. The remaining Employment Allowance of £2,500 (£4,000 – £1,500) is carried forward.

Month 2: £1,500 of the Employment Allowance is set against the liability for the month of £1,500, leaving nothing to pay. The remaining Employment Allowance of £500 (£2,500 – £1,500) is carried forward.

Month 3: The remaining £500 of the Employment Allowance is set against the liability for the month of £1,500, leaving £1,000 to pay. The Employment Allowance has now been used in full.

Months 4 to 12: The Employment Allowance has been used in full, so the employer’s Class 1 National Insurance liability for the month of £1,500 is payable in full.

Claiming the allowance

The Employment Allowance is not given automatically and must be claimed each year. This can be done through the payroll software, or via HMRC’s Basic PAYE Tools if the payroll software does not have an Employment Payment Summary (EPS) feature.

Although claims can be made at any time in the tax year, the earlier the claim is made, the earlier the employer will start benefiting from the Employment Allowance.

Claims can also be made retrospectively for the previous four tax years if the employer was eligible for the Employment Allowance, but did not claim it.

Reporting expenses and benefits for 2020/21

Reporting expenses and benefits for 2020/21

Employers who provided taxable expenses and benefits to employees during the 2020/21 tax year will need to report these to HMRC, on form P11D by 6 July 2021, unless the benefit or expense has been payrolled or is included within a PAYE Settlement Agreement. Benefits covered by an exemption do not need to be included.
Where taxable benefits have been provided, the employer must also file a P11D(b) by 6 July 2021. This is the employer’s declaration that all required P11Ds have been filed and also the statutory Class 1A amount.
Exempt benefit
The tax legislation contains a number of exemptions which remove a charge to tax. These may be specific to a particular benefit, such as those for mobile phones and workplace parking, or may be more general, such as the exemption for paid and reimbursed expenses, which applies if the employee would have been entitled to a tax deduction had they met the expense directly.
There are also a number of temporary Covid-19 specific exemptions that apply for the 2020/21 tax year. These include the provision or reimbursement of Covid-19 antigen tests and reimbursed homeworking equipment (such as a computer) to enable the employee to work at home during the pandemic if the equipment would be exempt if made available by the employer.
Remember, exemptions are only available if the associated conditions are met. However, care must be taken here where provision is made under a salary sacrifice arrangement and the alternative valuation rules apply as this may negate the exemption.
Taxable amount
The amount on which the employee is taxed is usually the cash equivalent value. This is calculated in accordance with the benefit-specific rules where these exists, as is the case for company cars, vans, living accommodation and employment-related loans. Where there is not a benefit-specific rule, the cash equivalent is determined in accordance with the general rule. This is the cost to the employer, less any amount made good by the employee. Amounts made good are only deducted where the employee makes good by 6 July 2021.
If the benefit is provided under an optional remuneration arrangement (OpRA), such as a salary sacrifice arrangement, the alternative valuation rules are used to calculate the taxable amount, unless the benefit is one which is specifically excluded from the ambit of those rules (such as childcare vouchers, pension provision and advice, employer-provided cycles and low-emission cars (l75g/km or less) or within the transitional rules for 2020/21. Under the alternative rules, the taxable amount is the salary foregone or cash alternative offered where this is more than the cash equivalent value.
HMRC produce worksheets which can be used to calculate the taxable amount for some benefits. These can be found on the Gov.uk website.
Reporting options
There are various options for filing P11Ds and P11D(b):
• using a payroll software package;
• using HMRC’s Online End of Year Expenses and Benefits Service;
• using HMRC’s PAYE Online Service; or
• filing paper forms.
Whichever method is used, the forms must be filed by 6 July 2021. Employees must be given a copy of their P11D or details of their taxable benefits by the same date.
Any associated employer-only Class 1A National Insurance must be paid by 22 July 2021 if paid electronically, or by 19 July 2021 if paid by cheque.

Personal and family companies – Optimal salary for 2021/22

Personal and family companies – Optimal salary for 2021/22

A popular profit extraction strategy for shareholders in personal and family companies is to pay a small salary and to extract further profits as dividends. The optimal salary will depend on whether the employment allowance is available to shelter any employer’s National Insurance liability that may arise.

Preserving pension entitlement

One of the main advantages of paying a small salary is to ensure that the year remains a qualifying year for state pension and contributory benefit purposes. To qualify for a full state pension on retirement, an individual needs 35 qualifying years.

For the year to be a qualifying year, earnings must be at least equal to the lower earnings limit. A director has an annual earnings limit, and for 2021/22, the annual lower earnings limit is set at £6,240. Where the shareholder is not a director, earnings for each earnings period must be at least equal to the lower earnings limit. For 2021/22, the weekly and monthly thresholds are, respectively, £120 and £520.

Contributions are payable by the employee at a notional zero rate on earnings between the lower earnings limit and the primary thresholds. The employee starts paying contributions once earnings exceed the primary threshold.

Optimal salary – Employment allowance is not available

The employment allowance is not available to companies where the sole employee is also a director. This means that personal companies will generally be unable to claim the allowance.

For 2021/22, the primary threshold is set at £9,558 (£184 per week/£797 per month) and the secondary threshold is set at £8,840 (£170 per week, £737 per month).

Although the maximum salary that can be paid without paying any National Insurance is one equal to the secondary threshold of £8,840 for 2021/22, it is beneficial to pay a higher salary equal to the primary threshold of £9,568. Employer’s National Insurance will be payable on the salary to the extent that it exceeds £8,840 at a cost of £100.46 (13.8% (£9,568 – £8,840)), however, this is outweighed by the corporation tax deduction at 19% on the additional salary and the employer’s NIC.

Once the primary threshold is reached, employee contributions are payable at 12%. At this point, the combined National Insurance cost of 25.8% (13.8% + 12%) is more than the corporation tax saving and paying a salary in excess of the primary threshold is not worthwhile.

Thus, where the employment allowance is not available, the optimal salary is equal to the primary threshold for 2021/22 of £9,568 (£184 per week, £797 per month).

Optimal salary – Employment allowance is available In a family company scenario, the employment allowance will be available if there is more than one employee on the payroll. As long as the employment allowance is available to shelter the employer’s National Insurance that would otherwise arise, the optimal salary is one equal to the personal allowance, set at £12,570 for 2021/22. No National Insurance is payable until the primary threshold is reached. Above this level, employee National

Insurance is payable at the rate of 12%. However, the additional salary saves corporation tax at 19%. However, once the personal allowance has been used, tax at 20% is payable as well as employee’s National Insurance of 12%, which exceed the corporation tax deduction of 19%. Thus, where the employment allowance is available, the optimal salary for 2021/22 is one equal to the personal allowance of £12,570 (£242 per week, £1,048 per month).

Statutory payments from April 2021

By law, there are various statutory payments that an employer must make to an employee while the employee is absent from work due to the birth, adoption or death of a child. The employer must pay employees who meet the qualifying conditions at least the statutory amount for the relevant pay period. The statutory payment rates are increased from April 2021 and apply for the 2021/22 tax year.

An employee is only entitled to statutory payments if their average earnings for the qualifying period are at least equal to the lower earnings limit for National Insurance purposes.

Statutory maternity pay

Statutory maternity pay (SMP) is payable to an employee who is on maternity leave. Although an employee can take up to 52 weeks’ statutory maternity leave, statutory maternity pay is only payable for 39 weeks. The payment ceases if the employee returns to work before the end of the maternity pay period (MPP).

For the first six weeks of the MPP, SMP is payable at the rate of 90% of the employee’s average earnings. For the remainder of the MPP, SMP is paid at the lower of 90% of the employee’s average earnings and the standard amount. For 2021/22, this is set at £151.97 (up from £151.20 for 2020/21).

Statutory adoption pay

Statutory adoption pay (SAP) is payable to one parent on the adoption of a child. The other parent may be entitled to claim statutory paternity pay. The provisions for adoption pay and leave largely mirror those for maternity pay and leave – the employee is entitled to take up 52 weeks’ leave, while the adoption pay period (APP) runs for 39 weeks, unless the employee returns to work before the end of this period.

As with SMP, SAP is payable at the rate of 90% of the employee’s average earnings for the first six weeks and at the standard amount, or 90% of the employee’s average earnings if lower, for the remainder of the adoption pay period. The standard amount is £151.97 per week for 2020/21.

Statutory paternity pay

Statutory paternity pay may be payable on the birth or the adoption of a child. The child’s father, mother’s partner or the adoptive parent who is not in receipt of SAP and leave may be entitled to statutory paternity leave and paternity pay. Eligible employees are entitled to two weeks’ statutory paternity leave which may be taken in a single block or in two one-week blocks.

Statutory paternity pay is payable while the employee is on statutory paternity leave (as long as the eligible conditions are met) at the standard rate (£151.97 for 2021/22) or, if lower, at the rate of 90% of the employee’s average earnings.

Shared parental pay The shared parental pay (ShPP) and leave provisions allow parents to share leave and pay following the birth or adoption of a child. Where an employee returns to work before the end of the MPP or APP, the employee can share the remaining leave and pay with their partner.

Shared parental pay is payable at the standard amount, set at £151.97 for 2021/22, or where lower, at 90% of the employee’s average earnings.

Statutory parental bereavement pay Parents are entitled to statutory parental bereavement leave following the death of a child under the age of 18 or a still birth after 24 weeks where this occurs on or after 6 April 2020. Bereaved parents are able to take two weeks’ parental bereavement leave, either in a single block or as two separate weeks. Eligible employees are also entitled to statutory parental bereavement pay (SPBP) at the standard amount (£151.97 for 2021/22) or, if less, at 90% of their average earnings.

IR35 and off-payroll working – What to do from 6 April 2021 if you provide services through an intermediary

Prior to 6 April 2021, workers who provide their services to a private sector organisation through an intermediary, such as a personal service company, need to consider whether the IR35 rules apply to them. This will be the case if the nature of the engagement is such that if they provided their services directly to the client rather than through their personal service company, they would be an employee of the client.

Where an arrangement falls within the scope of the IR35 rules, the worker’s intermediary needs to determine the deemed employment payment on 5 April at the end of the tax year. The intermediary must account for tax and National Insurance (employee’s and employer’s) and pay it over to HMRC.

Since 6 April 2017, workers providing services to a public sector body through an intermediary have not needed to consider IR35. Instead, under the off-payroll working rules, responsibility for determining whether the worker would be an employee if the services were supplied directly falls on the public sector body. If the worker would be classed as an employee were this the case, tax and National Insurance must be deducted from payments to the worker’s intermediary, and paid over to HMRC, together with the associated employer’s National Insurance.

From 6 April 2021, the off-payroll working rules, as they apply where the end client is a public sector body, are being extended. From that date, they will also apply where the end client is a medium or large private sector organisation. The changes will affect workers providing their services through an intermediary.

When agreeing an engagement from 6 April 2021 onwards, the worker should check the size of the end client so that they know which set of rules are in point.

End client is a medium or large private sector organisation

Where the end client is a medium or large private sector client, from 6 April 2021, the worker no longer needs to consider the IR35 rules. Instead, under the extended off-payroll working rules, the end client must determine whether the worker would be an employee if they provided their services directly to the end client, rather than via an intermediary.

The end client must provide the worker with a copy of the determination (the status determination statement). The worker should check this. If they don’t agree with it, they should tell the end client. The client must then reassess the status determination and let the worker know within 45 days whether the original determination stands, or issue a new one.

If the nature of the engagement is such that the worker would be an employee if the services were provided directly, the fee payer will adjust the invoice from the worker’s intermediary to exclude VAT and the cost of any recharged materials to arrive at the deemed employment payment, and deduct tax and National Insurance from the payment to the worker’s intermediary. This will have a cash flow implication – the worker’s intermediary will no longer receive payments gross.

The worker will receive credit for the tax and National Insurance paid against that due on payments made by the worker’s intermediary to the worker.

End client is a small private sector organisation

The extended off-payroll working rules do not apply to small private sector organisations.

Consequently, the position is the same on or after 6 April 2021 as it is now. The worker’s intermediary must continue to consider whether the IR35 rules apply, and operate them if they do.

End client is a public sector organisation

There is also no change from 6 April 2021 where the end client is a public sector body. As now, the public sector body must assess whether the off-payroll working rules apply and issue a status determination to the worker. If the engagement falls within the rules, they must deduct tax and National Insurance from payments to the worker’s intermediary.

National Living Wage and National Minimum Wage changes from April 2021

Under the minimum wage legislation, workers must be paid at least the statutory minimum wage for their age. There are two types of minimum wage – the National Living Wage (NLW) and the National Minimum Wage (NMW). From 1 April 2021, as well as the usual annual increases, the age threshold for the National Living Wage is reduced.

National Living Wage

The NLW is a higher statutory minimum wage payable to workers whose age is above NLW age threshold. Prior to 1 April 2021, it was payable to workers age 25 and above. From 1 April 2021, the NLW age threshold is reduced; from that date it must be paid to workers aged 23 and above.

National Minimum Wage

The NMW is payable to workers who are below the age of entitlement to the NLW. Prior to 1 April 2021, the NMW applied to workers above compulsory school leaving age and under the age of 25; from 1 April 2021, the NMW must be paid to workers under the age of 23 and over the school leaving age.

There are three NMW age bands:

• Workers aged 21 and 22 (prior to 1 April 2021, workers aged 21 to 24).
• Workers aged 18 to 20.
• Workers aged 16 and 17.

Apprentices

There is also a separate NMW rate for apprentices. It is payable to apprentices under the age of 19 and also to those who are over the age of 19 and in the first year of their apprenticeship.

Accommodation offset

Employers who provide their workers with accommodation are able to pay a lower minimum wage to allow for the cost of the accommodation provided. The amount that you are obliged to pay is found by deducting the ‘accommodation offset’ from the appropriate minimum wage for the worker’s age. The daily accommodation offset rate can be deducted for each full day for which accommodation is provided. For these purposes, a day runs from midnight to midnight. The weekly accommodation offset rate is seven times the daily rate.

Rates from 1 April 2021

Check you are paying the correct rates

Employers should ensure that the amounts that they pay workers on the NLW or NMW from 1 April 2021 are in line with the new rates. They should also ensure that they have processes in place to identify when a worker moves into a new age bracket. From 1 April 2021, this will include workers aged 23 and 24 who will be entitled to the NLW from that date.