NIM13132 – Benefits provided on termination of employment

For a Class 1A NICs liability to arise an earner must be chargeable to income tax under Schedule E on an amount which, for the purposes of the Income Tax Acts is, or falls to be treated as, an emolument received by him. The relevant legislation is section 10(1) of the Social Security Contributions and Benefits Act 1992 – see NIM13070

Section 579(1) and section 580(3) ICTA 1988, taken together, place statutory redundancy payments, which are due to employees under the Employment Rights Act 1996, solely within section 148 ICTA 1988.

Section 148 ICTA 1988 does not treat or deem payments within it to be emoluments. It describes an amount chargeable to tax under that section as ’income chargeable to Schedule E’. As payments and benefits charged to tax under section 148 are neither emoluments, or treated as such, a Class 1A NICs liability cannot arise.

Non statutory redundancy payments, may arise where employers pay more than the statutory limits but still for the same reason as statutory payments under the Employment Rights Act 1996. Those payments are also chargeable to tax solely by section 148 ICTA 1988.

Payments within section 148 qualify for the £30,000 exemption and tax will only be charged on amounts in excess of the exemption. Regardless of the tax charge, no Class 1A NICs liability can arise from payments and benefits charged to tax under section 148.

Remember, however, that section 148 includes only payments and benefits that are clearly compensation for loss of employment by reason of redundancy – as defined in the Employment Rights Act. Not included are other payments and benefits that may be provided at the same time but for different reasons, such as certain types of payments in lieu of notice.

Where other payments or benefits are provided on termination of employment, the same Class 1A NICs liability conditions described at NIM 13020 apply. The payments/benefits must be, or must be treated as, emoluments and must not attract a Class 1 NICs liability.