Managing the end of an employee relationship always has an element of complexity, especially where money is involved. There are specific ways termination payments, including a formula to use for tax.  Our short guide explains what you need to do when it’s time for an employee to leave.

Dealing with tax and NI on employee termination payments

The total amount of an employee termination payment is split in to two parts.

• The first part covers the notice period, and is subject to both tax and NICs.
• The second (or everything else) is taxable, subject to a £30,000 exemption.

In terms of understanding this as an employer you need to be aware of a few things. First of these is the formula for Post-Employment Notice Pay (PENP) – stay with us on this!

Working out Post-Employment Notice Pay (PENP)

The PENP formula works firstly by establishing the pay for any notice period not worked. It is made up of the last day worked, to the last day of the minimum notice period.

The formula takes the Basic Pay (BP) within the last pay period, and multiplies it by the PENP (which some calculators sometimes show as D, for Duration). This answer is then divided by the length of the last pay period (P).

After this calculation, to deduct any applicable taxable termination payment (T). This may include payment in lieu of notice, regardless of whether this is contractual.

The definitions used to calculate PENP

To help you make sure that you work out PENP correctly, it’s useful to know what some of the terminology actually means.

Basic Pay (BP)

This is defined as ‘employment income of the employee from the employment’ and includes:

• Overtime, commission, bonuses, allowances and gratuities.
• Any amount received by the employee in connection with the employment termination.
• Sums taxable as expenses and benefits.
• Employment income comprised of securities and options.
• Sums forfeited by the employee but which would otherwise have been considered earnings.

It’s worth noting that you mustn’t assume the BP from the previous complete pay period. Take care to calculate it.

Total Termination Payments (T)

This is defined as ‘the total amount of any payment or benefit received in connection with the termination’. It must be taxable as earnings but not pay for any leave entitlement which is taken before the end of employment, nor any bonus payment at the termination of employment.

Trigger date

This is the last date of employment if no notice has been either given or received, or, more commonly, the day that notice was given. This is not the same as the effective date of termination which is most usually the last day working for the business. The trigger date is always fixed.

Post-employment notice period

This applies to the duration of time from the day after employment ended until the last day of the minimum notice period. This applies whether this is statutory or contractual. This is important should an employee be asked to leave without working their notice.

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About The Author

Suzanne Goodier-Dodson

I'm a Payroll Manager with a degree in Mathematics, responsible for overseeing every aspect of payroll for our clients. In my spare time, I love to travel and going to gigs. Read my Staff Spotlight.

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