In August 2016, the government published its response to its consultation on simplifying the taxation of termination payments.

As a result of the consultation from April 2018:-

1) all PILONs will be treated as earnings subject to income tax, employer NICs and employee NICs;

2) payments relating to termination up to £30,000 will retain the exemption from income tax and employers’ and employees NICs.

3) foreign service relief will be abolished (except in relation to seafarers)

4) payments for injury to feelings will be excluded from the exemption for injury payments, except where this amounts to a psychiatric injury or a recognised medical condition.

5) all income tax and employers’ national insurance contributions will be aligned so that employers national insurance contributions will be payable on payments above £30,000.

What happens next?

Draft legislation has been published for further consultation and can be found on the link below. The closing date for comments is 5 October 2016.

See: https://www.gov.uk/government/consultations/simplification-of-the-tax-and-national-insurance-treatment-of-termination-payments-consultation-on-draft-legislation

Why is the Government doing this?

The Government wanted to review tax and NICs in relation to termination payments to:

Make sure the rules were simple;

  • Support those who lose their jobs;
  • Provide certainty for employee and employers; and
  • To make sure the rules are fair and not open to abuse or manipulation.

Employers beware!

The legislation is still in draft but from April 2018 if you are negotiating a settlement, you need to consider the new rules. What is clear is that the distinction between contractual and non-contractual PILONs will be removed so that the equivalent period of notice, even if there is no pay in lieu of notice, will be subject to tax and Class 1 NICs from April 2018.

Also, you will need to ensure that employer’s national insurance contributions are deducted on termination payments which exceed £30,000.

Don’t get caught out!