Welcome to the Birketts PENP calculator, which is designed to assist in the calculation of post-employment notice pay for tax purposes.
What is PENP?
Any termination payment (a ‘relevant termination award’) made to a departing employee that relates to a period of unserved notice is now chargeable to both income tax and Class 1 National Insurance contributions.
This means that payments in lieu of all or part of an individual’s notice entitlement can no longer be paid free of tax, regardless of whether or not there is any contractual pay in lieu of notice (PILON) clause in their employment contract.
The figure subject to tax is known as post-employment notice pay (PENP), and must be calculated according to the individual’s basic pay and the number of unserved days or months of notice.
Any remaining sum paid on termination (and which is not otherwise subject to tax) is taxable as employment income, subject to a £30,000 tax free exemption.
Why were the tax rules changed?
The tax rules in relation to termination payments changed with effect from 6 April 2018, and apply to all termination payments made on or after that date.
According to HMRC, the measure was intended to bring “fairness and clarity” to the taxation of termination payments by making it clear that all payments in lieu of notice are taxable as earnings, not just payments made under contractual PILON provisions. It means that the tax and NICs consequences relating to termination payments are the same for everyone, rather than being dependent on how the employment contract is drafted or how such payments are structured. In claiming to have made the rules easier to understand, HMRC has also increased the amount of tax revenue on termination payments.
What does our PENP calculator do?
The PENP calculation relies upon a complex statutory formula. Our PENP calculator is designed to assist employers in carrying out this calculation. It takes you through a short series of questions in order to help you identify the estimated PENP figure for tax purposes.
The tax calculator is designed to assist in the calculation of PENP liability in straightforward situations. It is not designed to assist with more nuanced circumstances, for which we would encourage you to seek specific advice. The calculations carried out by the app are only intended as a guide on the amount of any PENP liability and Birketts LLP accepts no liability in relation to the information contained in the app and the results of any calculation.
Our Employment Team and tax experts can assist with any questions you may have in relation to the termination of employment and the taxation of termination payments.
Access the PENP calculator
You can access the calculator via the following link: Birketts' PENP calculator.
We produce a variety of newsletters covering changes in legislation, topical news and issues affecting our clients. You can download the latest issue of Employment Law, our monthly newsletter for HR professionals, from our newsletter page. If you would like to automatically receive future issues please register your details.