Termination payments change
The government announced in 2016 that changes would be made to the rules relating to tax and national insurance contributions (NIC) on termination payments that will take effect from 6 April 2018.
Currently a pay in lieu of notice (PILON) payment can be paid tax free as damages for breach of contract if the PILON clause is non-contractual. This enables the notice pay to be included within the £30,000 tax exemption payment. If PILON clause is contractual however the payment for notice would automatically fall under taxable elements of the employee’s pay e.g holiday pay.
From April 2018 however this will no longer the be the position. Notice Pay will become taxable irrespective of whether the contract contains a PILON clause. The termination payment of £30,000 tax exemption remains unchanged unless this payment is in excess of £30,000 in which case the normal statutory tax and NIC will be deducted. Redundancy payments will not be affected by these changes and will remain a gross payment.
Other changes brought in by the regulations include changes to foreign service relief. Employees who have worked overseas but are resident in the UK when their employment terminates will be subject to the same tax deductions to termination payments as their UK counterparts. Visit our HR guides if you require more information on termination or exit management
