As of 6 April 2020, the way in which termination payments are treated for national insurance purposes is set to change. 

Currently, an employer can make a qualifying tax free termination payment of up to £30,000 to an employee, typically by way of a settlement agreement, with any balance over this sum being subject to income tax only. 

However, moving forward any balance paid to the employee over £30,000 will not only be subject to income tax, but now also class 1A employer national insurance contributions (NIC) will be due at 13.8%. 

Importantly, under the new regime, employer NIC will not be due if either:

  1. The employment terminated prior to 6 April 2020; or  
  2. The termination payment is being paid in instalments with the first instalment being paid prior to 6 April 2020.

This will be collected in ‘real-time’, as part of the employer’s standard weekly or monthly payroll returns and remittances to HMRC.

Despite this change, termination payments are to remain exempt from liability for employee NIC even if the amount is over £30,000.

The change will introduce further complexity around termination payments, and result in increased costs to the employer. This may be an issue that is factored into any wider negotiations, with the employer looking to pass this additional cost on to the employee by way of a lower settlement figure.