Government reforms (1): Taxation of termination payments

What do we already know?

Currently, payments on termination that are made under a contractual PILON (pay in lieu of notice) clause in an employee’s contract are taxed as earnings, but if there is no PILON an equivalent payment can often be made tax free (up to £30,000) as it is characterised as “damages for breach of contract.”

However, we’ve updated you previously that the law will change on 6 April 2018 so that all Payments In Lieu of Notice (PILON), whether contractual or non-contractual, are taxable and subject to Class 1 National Insurance Contributions (NICs).

What’s new?

In its February 2018 employer bulletin, HMRC has clarified the commencement provisions for the 6 April 2018 changes to the tax treatment of some payments made on termination of employment.

The changes will have effect for the tax year 2018-19, which HMRC has clarified as meaning that only payments made in, and relating to termination occurring in, 2018-19 and subsequent years will be affected by the changes.

This means that if you are discussing potential terminations now, it is worth ensuring that the date of any proposed terminations falls before 6 April 2018, if you want a non-contractual payment in lieu to benefit from the £30,000 exemption.

We are expecting full guidance from the HMRC on these changes shortly so watch this space…