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February 12, 2018

All PILON for Changes to Termination Payments from April 2018

The taxation of termination payments can be a tricky issue as termination packages often comprise several different payments and/or benefits, each of which may be subject to a different tax treatment.

New provisions within Finance (No. 2) Act 2017 mean that from 6 April 2018, payments in lieu of notice (PILONs) will be subject to income tax and NICs on the same basis as earnings from employment.

Current Law (to 5 April 2018)

Where a contract of employment does not provide payments/benefits to an employee in lieu of notice and their employer terminates the contract and requires that that the employee not work their notice period, then any payment that is made in lieu of notice (PILON) is not deemed to be taxable earnings. A payment of up to £30,000 could be made and would not be subject to income tax, or employer’s/employee’s national insurance.

Furthermore, both employer’s and employee’s NICs do not currently apply to any terminations payments made in excess of the £30,000 threshold, although income tax is due on termination payments in excess of this amount.

New Law (from 6 April 2018)

The new legislation introduced the concept of ‘post-employment notice pay’ (PENP). Broadly, PENP is a formulated amount that represents the basic pay that an employee would have been paid, were they to work their notice period.

Where a PILON is less than or equal to the PENP, the whole payment is classed as earnings and is therefore subject to income tax and NICs on the same basis as salary/wages. Where the PENP is less than the PILON, the PENP portion is subject to income tax and NIC in full, and any remainder will benefit from the £30,000 exemption.

In addition, alongside income tax, employer’s NIC will be chargeable on any termination payments made in excess of the £30,000 exemption after 6 April 2018. Termination payments will remain exempt from employee’s NICs.

Other Changes

The £30,000 exemption for termination payments has remained unchanged since 1988. The new legislation provides the power to vary the threshold upwards or downwards going forward.

For termination payments for employees who have spent significant periods working overseas, foreign service relief has been removed (although the relief is retained for seafarers).

Statutory redundancy payments remain exempt from income tax and NICs.

Whilst the new changes seek to provide simplification of termination payments, the taxation of such payments/benefits can still be complex. If you have any queries regarding the above, please contact a member of our team for a no-obligation chat.

Contact us today to discuss your tax requirements.
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