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New rules from 6 April 2021

These changes are part of Finance Bill 2021. They will have effect from 6 April 2021 and should be followed from that date.

These rules will apply to individuals whose employment is terminated on or after 6 April 2021 and who receive a termination payment on or after 6 April 2021.

Section 27 of ITEPA 2003 has been amended to clarify that amounts treated as earnings by section 402B ITEPA 2003 (鈥榩ost-employment notice pay鈥�) constitute taxable UK earnings if, and to the extent that, the employee would have worked in the UK during their notice pay.

This will ensure that non-residents鈥� PENP is charged to tax and National Insurance contributions on a similar basis to other UK employees. This change only affects individuals who physically perform the duties of their employment in the UK.

The percentage of the general earnings arising from PENP that are an amount of 鈥渢axable earnings鈥� from the employment in the tax year in which the employment is terminated is given by the formula 鈥楢 梅 B 脳 100鈥�.

B is the total amount of general earnings from the employment that it is reasonable to assume the employee would have received in respect of the post-employment notice period (within the meaning given by section 402E(5)) if the employee鈥檚 employment had not been terminated until the end of that period.

A is the amount of those earnings that it is reasonable to assume would have been taxable earnings by virtue of ITEPA s27 (1)(a) or (b). This will usually be the proportion of those earnings that would have been derived from work in the UK. If the employee would have worked solely in the UK during their notice period, the percentage is 100%.

Example 1

An employee is not UK resident but sometimes works in the UK, as well as working overseas for the same employer. The conditions for Foreign Service Relief are not met.

The employee has a 3-month (91 days) notice period and receives 拢10,000 as a termination payment. They earned 拢3,100 in the last month before the trigger date, which was 1 to 31 March (31 days).

The employer must first complete the PENP calculation:

(拢3,100 脳 91) 梅 31 = 拢9,100 PENP.

The employee received a 拢10,000 termination payment so 拢9,100 will be treated as general earnings and the remaining 拢900 will constitute Specific Employment Income and will benefit from the 拢30,000 exemption at section 403 of ITEPA 2003.

The employer must then work out what proportion of the PENP constitutes UK taxable earnings.

The employer calculates that the employee would have earned 拢9,300 during the notice period and 拢1,860 of this would have related to duties performed in the UK.

Applying the formula based on expected earnings during the notice period:

拢1,860 梅 拢9,300 脳 100 = 20%.

拢9,100 脳 20% = 拢1,820 UK taxable earnings under s27.

The remaining 拢7,280 is not taxable as UK employment income but may be taxable overseas.

Example 2

An employee is not UK resident and works 2 days per week in the UK (40%) and 3 days per week overseas for the same employer. The conditions for Foreign Service Relief are not met.

The employee has a 6-month (184 days) notice period and receives 拢40,000 as a termination payment. They earned 拢5,600 in the last month before the trigger date, which was 1 to 28 February (28 days).

The employer must first complete the PENP calculation:

(拢5,600 脳 184) 梅 28 = 拢36,800 PENP.

The employee received a 拢40,000 termination payment so 拢36,800 will be treated as general earnings and the remaining 拢3,200 will constitute Specific Employment Income and will benefit from the 拢30,000 exemption at section 403 of ITEPA 2003.

The employer must then work out what proportion of the PENP constitutes UK taxable earnings.

The employer identifies that the employee would have worked in the UK for 40% of the workdays during their notice period, so 40% of the earnings are attributable to duties performed in the UK.

拢36,800 脳 40% = 拢14,720 UK taxable earnings under s27.

The remaining 拢22,080 is not taxable as UK employment income but may be taxable overseas.

Periods up to 5 April 2021

HMRC鈥檚 view is that amounts treated as earnings by section 402B ITEPA 2003 (鈥榩ost-employment notice pay鈥�) do not constitute 鈥済eneral earnings in respect of duties performed in the United Kingdom鈥� for the purposes of section 27(1)(a) ITEPA 2003.

This means that, for years in which the employee is not resident in the UK (up to the tax year 2020 to 2021), earnings in respect of PENP are not 鈥渢axable earnings鈥�.

This interaction was not an intended result of the changes introduced in Finance Act (no. 2) 2017 and the amendment to section 27 ITEPA 2003 from April 2021 will ensure that non-resident individuals are charged to UK tax and National Insurance contributions on PENP, to the extent that their period of notice would have been worked in the UK.

Note that section 30 ITEPA 2003 (鈥楾reatment of earnings for year in which employment not held鈥�) may apply, with the effect that post-employment notice pay may be treated as earnings 鈥渇or鈥� an earlier year in which the employee was UK resident. Section 15 ITEPA 2003 (鈥楨arnings for year when employee UK resident鈥�) applies to PENP as normal, so any such earnings are 鈥渢axable earnings鈥�.