Termination Payments

Author: Keith Potter

In 2015 the government embarked on consultation about simplifying the tax treatment of termination payments, an area which has frequently given rise to dispute and uncertainty in the past. The government’s response to the consultation has now been published. The proposed changes will take effect in April 2018.

Briefly, the key changes are:

1. All Payments in Lieu of Notice (PILONs) will be treated as earnings subject to income tax, employer NICs and employee NICs. The existing distinction between contractual and non-contractual PILONS will be abolished.

2. Payments of compensation (i.e. payments other than PILONs) made purely in connection with the termination of employment will continue to be exempt from income tax and employers' and employees’ NICs up to the current threshold of £30,000. This will include payments such as redundancy compensation.

3. Income tax and employers' NICs will be payable on payments of compensation above £30,000.

It seems that under the new proposals HMRC will look solely at an employee’s basic pay when deciding the amount of a PILON which should be subject to tax and NICs.

This new approach will not be welcomed by those employees whose contracts of employment make no provision for a PILON to be made on termination of employment and who are currently able to receive a PILON tax free (subject to the £30,000 ceiling). However, it will bring certainty as to the tax treatment to be applied to all PILONs. It will also avoid the disputes which now arise from time to time between an employee and HMRC in cases where HMRC claim that there is an invariable practice on the part of the employee’s employer to pay a PILON when terminating employment and that the PILON is taxable on the basis that it is a payment to which the employee is entitled by reason of the employer’s invariable practice.

Contact Keith Potter or another member of the Employment team if you are concerned about the impact of these changes.

Keith Potter

Keith Potter

Consultant Solicitor

Tel: +44 (0)1306 502329

Office: Dorking

Email: k.potter@downslaw.co.uk