Category Archives: Employment & Payroll

The tax treatment of termination payments is governed by a detailed set of rules that determine how much is taxable and whether National Insurance contributions apply. The structure of a termination package can have a significant impact on the final tax position for both the employee and employer.

There still a number of important exemptions available. Employees do not usually pay tax or National Insurance on employer contributions made into a registered pension scheme as part of a termination package, although tax charges may arise if pension annual allowance limits are exceeded. Legal fees paid directly by an employer to a solicitor in connection with a settlement agreement are also generally exempt.

In addition, payments made because of an employee’s injury, disability or ill health may qualify for exemption where the condition prevents the employee from continuing to carry out their duties.

Employees do not normally pay tax on the first £30,000 of qualifying termination payments. This can include statutory redundancy pay, enhanced redundancy payments and certain non-cash benefits provided after employment ends. Any amount above the £30,000 threshold is generally taxable and may also trigger employer Class 1A NICs.

It should be noted that not all termination payments qualify for the £30,000 exemption. Amounts treated as earnings remain fully taxable and subject to employee and employer National Insurance. This includes payments in lieu of notice (PILONs), gardening leave payments and Post-Employment Notice Pay (PENP).

Employers providing employees with expenses or benefits in kind must comply with specific reporting, filing, and payment obligations each tax year. These requirements are designed to ensure that benefits are correctly reported, and that the appropriate tax and National Insurance contributions are accounted for.

For the 2025–26 tax year, employers must report employee expenses and benefits to HMRC and provide employees with copies of the relevant information by 6 July 2026. By the same deadline, employers must also submit form P11D(b) and declare the total Class 1A National Insurance contributions due unless all benefits have been payrolled.

Payment of Class 1A National Insurance is required by 22 July 2026 (or 19 July if paying by cheque). Where an employer operates a PAYE Settlement Agreement, any tax and Class 1B National Insurance must be paid by 22 October 2026 (or 19 October if paying by cheque). Employers who choose to payroll benefits must account for tax and Class 1 National Insurance through the monthly payroll process during the year.

Employers are required to maintain adequate records to support the reporting of all expenses and benefits, including valuation calculations and supporting documentation. Certain exemptions and dispensations may apply in limited circumstances, reducing reporting requirements.

Late submission of form P11D(b) attracts penalties of £100 per 50 employees for each month or part month of delay. Additional penalties and interest may also arise where payments to HMRC are made late.

From April 2026, the National Minimum Wage and National Living Wage rates have increased, and businesses should ensure payroll systems are updated immediately so that employees receive the correct statutory pay. These changes apply from the start of the 2026-27 tax year and form part of the Government’s ongoing policy of maintaining minimum earnings levels that reflect wider wage growth and living cost pressures.

The key rates from 1 April 2026 are as follows:

• Age 21 and over (National Living Wage): £12.71 per hour
• Age 18 to 20: £10.85 per hour
• Age 16 to 17: £8.00 per hour
• Apprentice rate: £8.00 per hour

These increases mean many employers will see a rise in employment costs during 2026-27, particularly where businesses rely on part-time staff, seasonal workers, or apprentices. Around 2.7 million workers are expected to benefit from the increase, reinforcing the importance of ensuring compliance from the first pay period after 1 April 2026.

For employers, the immediate priority is to review payroll settings, salary sacrifice arrangements, and employment contracts to confirm that hourly pay levels meet or exceed the new statutory thresholds. Failure to apply the correct rates can result in penalties and reputational risk, as HMRC has powers to require repayment of arrears and to publicly identify employers who do not comply with minimum wage legislation.

It is also important to consider knock-on effects. Businesses paying slightly above the previous minimum wage may wish to review pay differentials across their workforce in order to maintain fairness and staff morale. In practice, increases in the statutory minimum often lead to wider wage adjustments as employers maintain distinctions between entry-level and more experienced roles.

When a new employee joins your payroll, it is the employer’s responsibility to ensure they are aware of their rights and that the correct tax is deducted from their salary. This responsibility also applies when employing young people in your business.

You can employ young people from the age of 13, but special rules govern how long they can work and the types of work they can perform. Once someone turns 18, they are classed as an adult worker, and different employment rules then apply. Young workers and apprentices also have different National Minimum Wage rates compared to adult employees.

Before taking on young workers, employers must carry out a risk assessment to ensure a safe working environment. Young people may also be entitled to certain employment rights, including statutory maternity pay and ordinary statutory paternity pay if they qualify through continuous employment, paid time off for study or training and redundancy pay.

It is important to note that different rules apply if you engage volunteers or voluntary staff. Regardless, employers are responsible for health and safety, providing proper inductions, and ensuring employees are adequately trained for the tasks they are going to do.

In general, entertaining employees is an exception to the normal rule that business entertainment costs are not allowable for tax purposes. If an employer provides entertainment exclusively for employees and it is “wholly and exclusively for the purposes of the trade”, then the expenditure is allowable as a business deduction. Examples include a staff Christmas party, or a sporting event open only to employees.

It is important that the entertainment is not merely incidental to hospitality provided for customers. The definition of employees accepted by HMRC can extend to retired staff and the partners of existing and past employees.

Although the expenditure is allowable, the employees themselves may have to pay tax on the entertainment received and the employer will have to report this on form P11D. To counter this, many employers choose to include such items in a PAYE Settlement Agreement (PSA) and pay Income Tax and National Insurance contributions on behalf of the employees

Proper record keeping is important to be able to demonstrate where legitimate staff entertainment has taken place. Care should be taken to ensure that staff entertaining is reasonable, as excessive entertainment could lead to a tax charge for employees even if the employer’s costs have been disallowed (in whole or in part).