EIM13884 - PENP formula: how to calculate ‘BP’: ‘allowances’
EIM13874 explains that, with effect from 6 April 2018, the post-employment notice pay element of all ‘relevant termination awards’ is chargeable to income tax as general earnings. Post-employment notice pay is calculated using the PENP formula (see EIM13880).
EIM13882 explains how to calculate the amount of ‘BP’ for the purpose of applying the PENP formula.
‘BP’ means ‘Basic Pay’. ‘Basic Pay’ is the total employment income the employee receives, or has the right to receive (even if they give up that right) in their last pay period before the ‘trigger date’ but disregards various items including “…any amount received by way of… allowance…”.
The term ‘allowance’ is wide in scope. An allowance is an amount received by an employee as a supplementary payment over and above their standard pay. The period over which the allowance is paid, or the activity to which the allowance relates may, or may not be temporary in nature. Allowances could be paid:
- in recognition of particular circumstances, such as an additional responsibility allowance for temporarily undertaking duties not otherwise required under the employment contract
- in recognition of particular working arrangements, such as weekend working allowance for an employee working unsociable hours
- to reimburse an employee for out of pocket expenses, such as a travel allowance to cover an employee’s transport costs whilst performing duties of the employment
The above list is not exhaustive. Whether something is an ‘allowance’ or makes up part of an employee’s basic pay is a matter of fact and very much dependant on the terms of the particular agreement.
‘Car allowances’ are an example of a type of payment that could constitute either basic pay or an ‘allowance’ depending on the terms of the agreement. In general, if an employee is provided with a choice between a company car and a car allowance then the car allowance would likely be an allowance for the purpose of the PENP legislation. However, if the car allowance is provided with no alternative then the facts might suggest the amount of the allowance is, in reality, an additional amount of basic pay and not an ‘allowance’ for the purpose of the PENP calculation.
An allowance does not include any amount that has, in reality, been consolidated into an employee’s standard pay. For example, if an employee ceases to provide a benefit but compensates employees by increasing salaries or paying an allowance the amount should be included in basic pay.