Important changes to termination payments just around the corner

Next month, important changes to termination payments will take effect – and employers need to be aware of these changes and how they will affect payments in lieu of notice (PILONs).

From 6 April 2018, income tax and National Insurance Contributions (NICs) will need to be paid on all PILONs.

Currently, many PILONs benefit from tax exemptions affecting any termination payments that are not deemed taxable as ‘earnings’. This means that employers can make termination payments up to the value of £30,000 tax-free – and that such payments are not subject to NICs.

Under the existing rules, the tax treatment of a PILON is always dependent on whether or not an employer has the ‘contractual right’ to end an employment relationship with a worker by offering a termination payment as opposed to issuing a notice period.

In instances where the employer has this right under the terms of an employment contract, the PILON is typically subject to income tax and NICs. However, if the employment contract does not allow for this but an employer issues a ‘non-contractual PILON’ agreed with the worker outside of the contract, the payment will benefit from exemptions from both taxes.

Despite this, if an employer’s practice is always to pay in lieu, then a PILON term is ‘implied’ by this practice, meaning that the payment may sometimes incur tax.

What is changing?

Under the upcoming new rules, all PILONs – regardless of whether or not they are ‘contractual’ – will incur tax. This change has been announced in a bid to ‘simplify’ the system.

The new rules will affect any payments made on or after 6 April 2018 with regards to any terminations that take place either on or after that date.

So far, very limited information has been published regarding the changes, but HM Revenue & Customs (HMRC) is expected to publish full guidance any day soon.

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Donna Martin

Donna Martin

Partner at Mackrell Turner Garrett
Donna Martin is a Partner in the Employment team at Mackrell Turner Garrett’s London office. She advises both employers and employees on a full range of contentious and non-contentious issues. As an employment law expert, Donna has significant experience in drafting employment contracts and handbooks, advising on grievance and disciplinary procedures and preparatory work prior to tribunals, including advising on the advantages and disadvantages of settling cases.