Employers are required to subject any Post-Employment Notice Pay (PENP) element of a termination award to tax and NIC as general earnings. A previously optional concessionary practice when calculating PENP in certain circumstances becomes mandatory from 6 April 2021.

Broadly, PENP – calculated in accordance with a statutory formula – represents the ‘basic pay’ an employee would have received, had they worked their notice period in full.

However, the PENP formula can give rise to unintended results where:

• The last pay period of the employee to end before the ‘trigger date’ for the termination is a month;
• The employee’s salary is paid in 12 equal monthly instalments; and
• The post-employment notice period (i.e. the period the employee would have worked had they served their notice in full) is not a whole number of months.

In these circumstances, HMRC have by concession allowed employers to calculate PENP based on an averaged 30.42 days in the employee’s last pay period (as the value of ‘P’ in the PENP formula), rather than the actual number of days in that period (either 28/29/30/31 days), if doing so was to the employee’s advantage. Finance Bill 2021 will place HMRC’s concessionary practice on a statutory footing where the relevant employment is terminated, and the termination payment is made, on or after 6 April 2021.

However, the new statutory treatment of relevant cases is mandatory, rather than optional as was the case with HMRC’s concession. HMRC recently confirmed to KPMG that this change is intentional.

Employers should therefore ensure they apply the new statutory calculation consistently to relevant terminations.

HMRC’s concessionary treatment continues to apply to termination payments made on or after 6 April 2021 if the relevant employment was terminated prior to that date.

For further information please contact :

• Colin Ben-Nathan
• Hayley Perkin