Redundancy - PENP

Hi all,

I'm hoping someone might be able to help me out with this.

I'm due to be made redundant from my company soon which would originally be after a 3 month notice period. I have instead asked my company to make me redundant after only 1 month which they have agreed to. They have informed me though, that because I would be leaving before the end of the entitled notice period there would be tax implications with something called PENP. I've had a google of it but after looking at many many articles on it I'm still not 100% sure how it works.

As it stands I'm due to receive a redundancy payment of £40,000, £30,000 of which will be tax free and £10,000 of which will be taxed. This payment excludes any owed holiday or bonuses which I believe I am right in saying will be classed as income and taxed accordingly. Now as far as I can tell, PENP would only apply if I was going to be paid for the 2 months notice I will not be working (also known as PILON). I'm not sure if I will get any PILON however, or whether the mutual agreement to terminate early will actually be classed as unpaid. In each scenario what happens here?

In my mind it is one of the following options:

If I DO receive the 2 months I leave early as PILON, it will be classed as PENP and subject to tax and NI deductions.

If I DON'T receive the 2 months I leave early and just terminate without any extra payment, nothing happens and I don't have to pay any tax.

A couple of sites I've looked at suggest that by agreeing to not work my full notice I will then lose some of my £40,000 redundancy payment to some kind of PENP related tax. Is that true?


Many thanks.

Comments

  • chrisbur
    chrisbur Posts: 4,012
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    edited 26 August 2021 at 8:15PM
    There are two threads on here where employers seem to be advising employees that they will have to pay tax on money they do not receive if they leave early.
    https://forums.moneysavingexpert.com/discussion/6291027/paying-tax-on-notice-payment#latest
    https://forums.moneysavingexpert.com/discussion/6283503/taxed-on-notice-period-not-being-taken/p1

    It is my belief that it is the rule regarding PENP that is being mis-understood.  Until recently some people paid tax on pay in lieu of notice PILON and some did not.  This has now changed so that all PILON is taxable on that part that represents the amount that would have been paid to the employee had they worked their notice, this being the PENP.  Any other payment made with that may sometimes be included in the £30000 that is tax free.  This has resulted in phrases like 
    "All employees will pay tax and Class 1 NICs on the amount of basic pay that they would have received if they had worked their notice in full,"
    This means that if you do not work your full notice but instead get PILON then that part of your PILON that represents your basic pay that you would have got if you worked your notice will have tax and NI deducted.

    I cannot see how a change in the rules relating to PILON can affect the tax someone pays who does not get any PILON.
  • chrisbur said:
    There are two threads on here where employers seem to be advising employees that they will have to pay tax on money they do not receive if they leave early.
    https://forums.moneysavingexpert.com/discussion/6291027/paying-tax-on-notice-payment#latest
    https://forums.moneysavingexpert.com/discussion/6283503/taxed-on-notice-period-not-being-taken/p1

    It is my belief that it is the rule regarding PENP that is being mis-understood.  Until recently some people paid tax on pay in lieu of notice PILON and some did not.  This has now changed so that all PILON is taxable on that part that represents the amount that would have been paid to the employee had they worked their notice, this being the PENP.  Any other payment made with that may sometimes be included in the £30000 that is tax free.  This has resulted in phrases like 
    "All employees will pay tax and Class 1 NICs on the amount of basic pay that they would have received if they had worked their notice in full,"
    This means that if you do not work your full notice but instead get PILON then that part of your PILON that represents your basic pay that you would have got if you worked your notice will have tax and NI deducted.

    I cannot see how a change in the rules relating to PILON can affect the tax someone pays who does not get any PILON.
    Thank you for your response. I too had the same thought of "how can they tax me on what I haven't earned?" but unfortunately I don't think it's as simple as that. After a lot of digging I think this is how it works...

    It used to be that employers could include your PILON and redundancy all together in one bundle of money allowing you to take full advantage of the £30,000 tax free limit. Under the new rules however, PILON has to be taxed. Therefore PILON is separated out and tax and NI paid on it. If you don't receive any PILON but you are still getting a redundancy pay out (above statutory), AND you don't work your notice period, then the Government seem to want a piece of it.

    If you look at the simple calculation for PENP it's ((BP × D) ÷ P) − T

    BP is gross monthly salary
    D is your remaining notice period after leaving in days
    P is the number of days in the past pay (which they've averaged out at 30.42)
    T is any PILON (subtracted because you can't pay tax twice)

    So on that basis if you DON'T have any PILON, your number is always going to be positive and therefore you will owe tax and NI.

    In my situation I am not receiving any PILON. Therefore using the calculation I end up like this:

    ((£3800 X 56) ÷ 30.42) - 0 = £6995 (lets call it £7000). Therefore I have to pay tax and NI on that £7000.

    HOWEVER, because my redundancy payout is £40,000 I am already being taxed on £10,000. The PENP comes out first so I pay tax on £7000 PENP, then on the remaining £3000 above the limit, and then the £30,000 is tax free. This then might make people think well if it makes no difference as you would be paying tax on the whole £10,000 with or without PENP, it really applies when you are getting less. So if I was only getting a £30,000 redundancy reward, I would actually only get £23,000 tax free because of the PENP figure. 

    Now this is how I personally have interpreted it. There seems to be huge amounts of confusion amongst the many many accounting and legal sites I found articles on, as well as my companies HR (a big FTSE 100 company as well so should be used to dealing with this sort of thing). That speaks volumes to our governments tax system. I will report back when I receive my final figures to confirm what the situation is though. 
  • chrisbur
    chrisbur Posts: 4,012
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    Forumite
    The calculation of PENP is to calculate the amount of PILON that is to be used for the deduction of tax and NI.  PILON is paid when the employer agrees or indeed sometimes insists that the employee leaves before completing all or some of the notice period that they are entitled to.   This PILON was once either taxable or not taxable depending on whether the PILON was paid because it was a contractual payment, deemed to be contractual or non-contractual.  All PILON that relates to an employee's basic pay is now taxable so everyone is treated the same.  The PENP is the way to calculate the taxable part of this or if it is all taxable.  If no PILON then no PENP needs to be calculated.
    The best details I have seen regarding this are here....
    https://www.birketts.co.uk/our-services/services-for-businesses/employment/penp-calculator/post-employment-notice-pay-(penp)-q-a

    It defines PENP as "Post-employment notice pay (PENP) is the amount of a ‘relevant termination award’ paid to a departing employee that represents a payment in lieu of all or part of their notice entitlement. "


  • This was my belief originally as well, but then I kept seeing contradictory statements.

    I have since read the guidance on HMRC and it aligns with what you have said.

    'Statutory redundancy payments and approved contractual payments (as defined at section 309(4)-(6) ITEPA 2003) are not within the definition of ‘relevant termination awards’ (see EIM13874) and so are not subject to PENP. These payments are always chargeable to income tax as specific employment income and benefit from the £30,000 threshold available in section 403 ITEPA 2003.'

    Based on that I believe my ex-gratia sum to be considered an approved contractual payment and NOT a relevant termination award. Therefore it is not subject to PENP as stated. ]

    Thanks again for your help.
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