Have you Heard of the Changes to Tax Treatment of Employment Termination Packages?


Employment Law Partner

Thu 22 March 2018 Have you Heard of the Changes to Tax Treatment of Employment Termination Packages?

There are tax changes in the pipeline which will affect employees receiving an exit or termination package from their employers. One change is coming into force from 6 April 2018, the other has been delayed to 2019 but both will impact on severance packages.

The first changes relates to payments made in lieu of notice pay (known as PILON). HMRC has wanted to make this change for quite some time, as its view is that all notice pay is income and therefore taxable.  However, up to now, employees have been able to use a loophole that allowed employee s to receive notice pay untaxed, provided that there was no reference to the employer’s ability to make a PILON in the terms and conditions of the relevant employee.

Certainly in the cases of less senior employees, “PILON clauses” do not regularly feature in standard terms and conditions therefore their notice could often be paid tax-free. This is changing from April.  Now, regardless of whether there is a “PILON clause” or not, any employee receiving pay in lieu of notice will have tax applied and this money will also be subject to Class 1 NIC’s.

From April 2019, termination payments exceeding the £30,000 threshold for tax purposes will now also be subject to employer’s National Insurance contributions. Previously payments in excess of this limit were exempt from such contributions altogether.

Luke Hutchings, Partner at Taylor Rose TTKW, commented “while these changes may seem slight, there can be important ramifications for employees both senior and junior, who might be receiving a termination payment.  Practitioners should take note well in advance of the changes being made.”

For more information or advice please contact contact our friendly employment team on 01733 333333.

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