April is fast approaching and with it come changes to the taxation of termination payments. 

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The tax treatment of termination payments has been the same for quite some time.  Rather than taking note of the old saying “if it isn’t broken, don’t fix it” the Government decided to review and “simplify” the process.  This has resulted in things becoming a bit more complex!

Some of the suggestions have (thankfully!) fallen by the wayside but a few are going ahead and they take effect in April 2018.  A key change is the tax treatment of Payments In Lieu Of Notice (PILONs).

Under tax legislation, it has been the rule for some time that certain payments made to employees on termination of employment can be made free from tax and National Insurance Contributions (NICs) up to £30,000.

As things stand, the tax treatment of PILONs is different depending upon whether the employer has the contractual right to make the payment. In simple terms, if the employee’s contract terms set out the right to make a PILON that means there is no breach of contract and it has to be taxed in the normal way like salary. If the terms are silent it can be paid tax free as damages, therby compensating the employee for the breach of contract in not allowing them to work their notice.

This has meant that employees can end up receiving a bit more cash and employers pay out a bit less too (no employer’s NIC’s).  From April 2018 all PILONs will be treated the same.  They will be subject to tax and NI contributions whether or not there is a clause allowing the employer to make a PILON.  This means that there will be no downside to including a clause in contracts of employment permitting payments in lieu of notice.

Other key areas of change include:

  • Requiring employers to pay employer NICs on payments made to employees over £30,000.  Currently, payments over the £30,000 are subject to tax on the excess but not NICs.

  • Additional tax free allowances relating to foreign service and injury to feelings will no longer apply.

We Can Help

At MW Solicitors, our mission is "To make quality legal services accessible to everyone" including Employers and Employees.

Our experienced and specialist team of Employment Lawyers can help across a full spectrum of Employment Law issues including termination payments and drafting of employment contracts.  If you need and Emploment Lawyer call us today on 020 3551 8500 or use our Contact Us form to arrange a callback.

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