The National Insurance Contributions Bill was introduced into Parliament on 25 April 2019.
The Bill introduces an important simplification of the tax system that helps to more closely align the Income Tax and National Insurance contributions treatment of termination awards and sporting testimonials.
These changes will close a loophole in the tax system. The current misalignment incentivises well advised employers to disguise final payments as compensatory termination payments that benefit from a National Insurance contributions exemption.
The government confirmed at Budget 2018 that these measures would take effect from 6 April 2020.
This Bill introduces a new 13.8% Class 1A Employer National Insurance contributions charge to any part of a termination award or payment from a sporting testimonial, that are already Income Tax liable.
Any income derived from termination awards or sporting testimonials will remain free from Employee National Insurance contributions.
The rules for determining the Income Tax treatment of income from termination awards and sporting testimonials were legislated for in Finance (No .2) Act 2017 and Finance Act 2016, respectively.
A termination award is a payment received in connection with the termination of a person’s employment.
At Budget 2016, the government announced that it would reform the Income Tax and National Insurance contributions treatment of termination awards. Currently, certain forms of termination awards are exempt from Employee and Employer National Insurance contributions and the first £30,000 is free from Income Tax.
The Bill will align the Employer National Insurance contributions treatment of termination awards in excess of £30,000, with the Income Tax treatment for such payments.
This Bill does not affect the:
* Employee National Insurance contributions treatment of termination awards
* National Insurance contributions treatment of statutory redundancy pay and compensation
Termination awards will remain exempt from Employee National Insurance contributions. The £30,000 threshold ensures that:
* no statutory redundancy pay on its own will be affected
* compensation for injury suffered in the workplace will remain free from Income Tax and National Insurance contributions
The Income Tax changes were made in the Finance (No 2) Act 2017 and took effect from 6 April 2018.
Sporting testimonials are a practice where a club establishes a testimonial committee to organise a sporting event to honour a player for their service upon retirement. The primary purpose of a sporting testimonial is to support sportspeople who may not have had time to build up retirement savings before they stop playing.
At Autumn Statement 2015, the government announced that it would reform the Income Tax and National Insurance contributions treatment of payments derived from sporting testimonials.
This Bill therefore aligns the National Insurance contributions treatment of income from sporting testimonials with the tax treatment by:
* bringing payments from sporting testimonials that are non-contractual or non-customary and organised by an independent testimonial committee within the scope of Class 1A National Insurance contributions
* applying the existing £100,000 Income Tax exemption to the National Insurance contributions treatment
* ensuring the new National Insurance contributions threshold will apply to only one testimonial in a lifetime, which could come from one event or a series of events held over a 12 calendar month ‘testimonial year’
The Income Tax changes were made in the Finance Act 2016 and took effect from 6 April 2017.
