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 introduction of PENP to ensure that all contractual, customary, and non-contractual payments in lieu of notice are considered and consistently subjected to tax and National Insurance contributions
  • the removal of foreign service relief on termination payments to UK resident individuals (this measure did not apply to seafarers)
  • clarification that the exemption for injury does not apply in cases of injured feelings
  • alignment of the rules for income tax and National Insurance contributions so that employer’s National Insurance contributions will be payable on qualifying termination payments above £30,000 from the 6th April 2020 and these would be charged as Class 1a contributions which would be calculated and paid over in real time.
  • 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.

    "I have always found the Learn Centre to be helpful and supportive of not only mine but the team's payroll training needs. The blended learning approach works well for me and I would not hesitate to recommend them as a Payroll training specialist provider not only for online delivery (e-learning) but also face 2 face and in-house. The Payroll Professionals Conference is also a great networking opportunity."

    Kresh Veerasamy
    Payroll Manager at Cancer Research UK

    View on Linkedin

    Have a question?

    Leave us your details or call us on 01798 861111

    Ensure you're up to date and compliant

    Are you happy for us to email you from time to time with payroll related information, legislation and updates?

    Yes please, keep me up to date