The new policy is based on the part of a termination payment which is treated as being a payment in respect of the employee’s notice period and subject to income tax and employee’s and employer’s National Insurance contributions. Under the current guidelines and legislation, this is called Post-Employment Notice Pay (PENP).
This new measure provides an alternative PENP calculation where an employee’s pay period is defined in months, but their contractual notice period or post-employment notice period is not a whole number of months.
The measure also aligns the tax treatment of PENP for individuals who are non-resident in the year of termination of their UK employment with the treatment for all UK residents. Currently, PENP is not chargeable to UK tax if an employee is non-resident for the tax year in which their employment terminates. As such, the measure will ensure that non-residents are charged tax and National Insurance contributions on PENP to the extent that they would have worked in the UK during their notice period. This change only affects individuals who physically performed the duties of their employment in the UK.
PENP was initially introduced in April 2018 as part of the Finance (No.2) Act 2017 and the act included:
The measure will have effect from 6 April 2021. It will apply to those individuals who have their employment terminated, and where the termination payment is received on or after 6 April 2021.
Since October 2019, HMRC has exercised the managerial discretion available under the Commissioners for Revenue and Customs Act 2005 to provide for an alternative calculation for PENP for use where it is advantageous to the employee. This will continue to apply until 6 April 2021.
The key changes to the legislation from April 21 will be to include an alternative calculation for PENP at section 402D ITEPA 2003 for employees who have a pay period defined in months, but a contractual notice period defined in weeks or days, or where the post-employment notice period is not a whole number of months. This will ensure that all employees’ PENP is calculated consistently on the termination of their employment.
The amendment to section 27 ITEPA 2003 will ensure that non-resident individuals are charged to UK tax and National Insurance contributions on PENP, to the extent that their period of notice would have been worked in the UK.
More details can be found here.