National Insurance Contributions (Termination Awards and Sporting Testimonials) Act 2019
26 July 2019
The Act introduces an essential simplification of the tax system that helps to more closely align the Income Tax and NICs treatment of termination awards and sporting testimonials. Currently, the fact that termination awards and sporting testimonials are subject to different Income Tax and NICs treatment creates confusion.
The National Insurance Contributions (Termination Awards and Sporting Testimonials) Bill was introduced into Parliament on 25 April 2019 and received Royal Assent on 24 July 2019, to become the National Insurance Contributions (Termination Awards and Sporting Testimonials) Act 2019.
The changes brought in by the Act will close a loophole in the tax system. The current misalignment incentivises well-advised employers to disguise final payments as compensatory termination payments that benefit from a NICs exemption.
This Act introduces a new 13.8% Class 1A Employer NICs charge to any part of a termination award or payment from a sporting testimonial, that are already Income Tax liable. Any income derived from termination awards or sporting testimonials will remain free from Employee NICs.
The government confirmed at Budget 2018 that these measures would take effect from 6 April 2020.
Geographical extent – The Act makes corresponding changes for Great Britain and Northern Ireland, ensuring that these changes apply throughout the United Kingdom.
The Act will bring about reforms that will more closely align the treatment of employer NICs (Class 1A) on termination payments in excess of £30,000 that are subject to PAYE income tax. At present, some forms of termination awards are exempt from both employee and employer NICs and the first £30,000 is free from Income Tax.
The Act will not affect:
- Employee NICs treatment of termination awards
- NICs treatment of statutory redundancy pay and compensation
Income Tax changes were made in the Finance (No 2) Act 2017, which took effect from 6 April 2018.
The Act aligns the NICs treatment of income from sporting testimonials with the income tax treatment by:
- bringing payments from sporting testimonials that are non-contractual or non-customary and organised by an independent testimonial committee within the scope of Class 1A NICs
- applying the existing £100,000 Income Tax exemption to the NICs treatment
- ensuring the new NICs threshold will apply to only one testimonial in a lifetime, which could come from one event or a series of events held over a 12 calendar month ‘testimonial year’
Income tax changes were made in the Finance Act 2016 and took effect from 6 April 2017.