The prospect of a redundancy payment may be the only silver lining in losing your job, but HMRC is poised to take more of your payout under another stealth tax hidden in last week’s autumn statement.
All payments made in lieu of notice will be subject to tax and national insurance, meaning that the taxman will grab up to a third of your money because of a reworking of already complex rules.
“The impact of the change is going to be felt mostly by lower-paid employees. Ironically, employees who receive more generous termination packages will see a far less drastic reduction in their take-home pay. Workers receiving a payout of £30,000 are going to feel the pinch proportionately more than a top executive getting £100,000,” says Mark Groom, a partner at Deloitte, the accountant.
At present, payments in lieu of notice are subject to tax and national insurance only if the worker is contractually entitled to a golden goodbye lump sum. If there is no such entitlement, the first £30,000 is free of both. Income tax, but not national insurance, is charged on payouts over £30,000. The change will take effect in April 2018. From then, someone who gets a £30,000 payment in lieu of notice, a £5,000 redundancy payment and £2,000 in holiday pay will receive 31 per cent less than they would get today. As a result of the deduction of income tax and national insurance, they will be left with £23,560, down from £34,160.
The taxman will add the payment to your earnings for the year, meaning that some employees will be pushed into higher tax brackets. Income tax will be levied at the highest rate paid by the worker. National insurance will be charged at 12 per cent (the rate on earnings up to £45,000) or 2 per cent (the rate charged thereafter).
Often workers facing dismissal are asked to leave immediately and given a pay-off. Many are obliged to go on “gardening leave”, so that they cannot take up employment elsewhere for months. “A lot of people rely on these payments because they are part of the bargain you make with the employer. If it all goes pear-shaped, at least you will get a pay-off,” says Mr Groom.
The new system extends the reach of national insurance. The law has traditionally made this division between contractual and non-contractual payments, but “HMRC has never liked this distinction, because it says termination payments represent a period of work that you would you have been taxed on,” explains Mr Groom.
The extra income the Treasury will earn from national insurance in the next five years is £38bn; more than from VAT
The change is part of the creeping growth of national insurance that will soon lead it to overtake VAT as the Treasury’s second-largest source of revenue, behind income tax. The tax grab from national insurance is set to rise £38 billion in the next five years, according to forecasts. By contrast, the income tax take will rise £33 billion. The Times revealed last week that annual national insurance contri-butions will increase by £240 for people earning over £43,000, in another stealth tax not mentioned in the chancellor’s speech last week.
Tina Riches, the head of national tax at Smith & Williamson, believes national insurance is in danger of becoming a “gigantic stealth tax”. “The public needs to be more aware that it is a significant amount that they are paying. A lot of people will be paying more in national insurance than income tax,” she warns.
Is any part of my payment safe?
Yes. Typically your termination payout will be made up of different elements. Statutory pay, which the government says you must be given, or redundancy pay that is not a payment in lieu of notice, will still be non-taxable for the first £30,000. You do not have to pay national insurance on any of it.
What about employers?
They are going to have to fork out national insurance contributions at 13.8 per cent of any redundancy payments they make over £30,000. “Some employers considering job cuts may bring these forward rather than wait until costs increase after April 5, 2018,” says Mr Groom.