Chapter NIM13201

Record NumberNIM13201
Published date11 April 2016

With effect from 6 April 2020, the NICs (Termination Awards and Sporting Testimonials) Act 2019 (The Act) places an employers’ (Class 1A) NICs charge on payments made on termination of employment which are:

  • in excess of £30,000
  • taxed under s403 ITEPA 2003 and
  • not already charged to Class 1 NICs as earnings, mirroring the income tax treatment.

The new Class 1A liability does not affect individuals as it is paid by the employer. The employer must pay and report Class 1A payments made on termination awards in real time, through their RTI returns.

See NIM13203 for more details.


The Office of Tax Simplification (OTS) stated during their 2013-14 review of the tax and NICs treatment of termination payments that

“the well-advised can often end up better off than the unadvised, as they are more able to structure their employment contract (or, indeed, their termination payment) to achieve the better tax treatment”

The main reason that businesses had an incentive to do this was the absence of and employers’ National Insurance contributions on termination awards of any size. Some awards were taxed as earnings, others were taxed only above £30,000 and still others were completely tax and NICs free. This complexity left the tax system open to manipulation where employers and employees were looking to achieve a tax advantage.

The government announced at Summer Budget 2015 that it would consult on simplifying that tax and NICs treatment of termination awards.

Following the consultation, at Budget 2016 the government announced the reform of the tax and NICs treatment of termination awards and published draft legislation for consultation.

The income tax measures announced at Budget 2016 were legislated for in Finance Act 2017 and took effect from April 2018. The government confirmed at Budget 2018 that the associated reforms to NICs legislation would be in place for April 2020.

Section 5 of Finance Act 2017 made changes to the taxation of termination awards by inserting new sections 402A to 402E into ITEPA 2003. The effect of these new sections is that some awards that previously formed part of a termination payment and were therefore not taxable until a £30,000 threshold was exceeded are now treated as general earnings. They are now taxable without any threshold applying.

Sections 402B to 402E ITEPA 2003 set out calculations for working out which parts of the termination award should be treated as general earnings. In essence, all...

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