Changes to Post Employment Notice Pay effective today

 

The calculation of Post Employment Notice Pay (PENP) is changing from today, 6 April 2021. PENP calculations using the ‘standard formula’, for employees who are not paid monthly or whose notice period is not expressed in months, now require employers to use a new value for the calculations.

The ‘standard formula’ uses the number of days in the pay period (‘P’) as one of the inputs and this can vary between 28 and 31 days depending on when in the year employment terminates. The existing formula had the unintended consequence of having different outcomes depending on which calendar month employment is terminated. The new change will result in a more consistent calculation. Instead of using the number of days in the pay period, the average number of days in a month is to be used, being 30.42 days. In light of this change, employers should review PENP calculations and settlement agreements which have a termination date on or after 6 April 2021 to ensure that income tax and National Insurance Contributions are correctly accounted for.

What is Post Employment Notice Pay (PENP)?

PENP was introduced to change the way termination payments were taxed. There had previously been a discrepancy between how contractual, non-contractual or customary payments in lieu of notice were taxed. PENP reflects the part of a termination payment which is being treated as payment for the employee’s notice period and is therefore subject to income tax and National Insurance Contributions.

How is PENP currently calculated?

PENP is currently calculated on the basis of either the ‘simplified formula’ or the ‘standard formula’.  The ‘simplified formula’ applies to an employee who is paid monthly, whose contractual notice period is expressed in months and whose employment is terminated with immediate effect or whose unworked period of notice is a whole number of months. The ‘standard formula’ is more complex and applies where the pay period is not expressed in months or the notice period, or the unworked portion of it is not expressed in months; to address such cases the standard formula uses the number of days in the pay period (“P”) as one of the inputs and this can vary between 28 and 31 days. The existing formula had the unintended consequence of having more or less favourable outcomes depending on when in the calendar year employment terminated.

What is changing?

The change to the ‘simplified formula’ will result in a more consistent calculation. Instead of using the number of days in the pay period as “P” the average number of days in a month should be used, being 30.42 days.HMRC has also amended the ‘simplified formula’ so that it will only apply where an employee is paid in equal monthly instalments. This has the potential impact of limiting the application of the ‘simplified formula’ to annual salaried staff, rather than hourly paid staff whose basic pay may vary from month to month. It is important for employers to be aware that many pay variations (overtime, bonus, commission) don’t count towards basic pay for the purposes of the ‘simplified formula’. So the scope of affected individuals is likely to be limited.

Next steps

Employers should review PENP calculations and settlement agreements which have a termination date on or after 6 April 2021 to ensure that income tax and National Insurance Contributions are correctly accounted for. Employers should also check PENP calculations when carrying out redundancy exercises.

If you would like to discuss the impact of these changes please contact us.