Make sure you’re calculating Compensatory Notice Payments correctly

In April 2018, the HMRC changed the way Compensatory Notice Payments (CNPs) are taxed. Have you caught up yet?

The changes are twofold:

1.  CNP is a compensatory payment based on loss suffered. Before April 2018, a deduction of “notional” tax at 20% was deducted from the payment to arrive at an approximate amount of net pay for each week’s claim. This notional tax was not actually paid over to HMRC – it was only a calculation amount.Now, tax deduction from CNP should be an actual deduction of tax which is paid over to HMRC through RTI. CNP is now also subject to NI deductions, which must also therefore be accounted for and paid over to HMRC.
As at March 2019, the RPS has not yet applied this change to their own payments. They have, however, advised us that they have written to employees who have received payments since 6 April 2018 to advise them they may have underpaid PAYE.

2.  The weekly statutory limit used to be applied to the payment after the deduction of all mitigation and “notional tax”.Under the new payments system, the statutory limit is applied after mitigation but before the deduction of tax and NI deductions. These are actual deductions, which are paid to HMRC. This means the employee will receive a lower overall payment.