The UK Government has announced changes to the tax treatment of termination payments following the conclusion of its recent consultation. Draft legislation has now been published which will come into force in April 2018.

The main changes are as follows:

  • All payments in lieu of notice (“PILONs”) will be fully taxable regardless of whether there is a PILON provision in the employment contract or not.
  • Employer National Insurance contributions will be payable on the balance of any termination payment above £30,000. Termination payments will remain free of employee National Insurance contributions.
  • Payments in respect of injury to feelings will be taxable. This resolves a current divergence of judicial opinion on the matter. Tax free payments in respect of injury or disability may only be made in respect of any injury of a physical or psychological nature which means that the employee is not able to perform their job properly. The UK Government has also confirmed that the £30,000 tax free exemption for termination payments will remain in place. Proposals had been made during the consultation to reduce the tax free amount or link it to length of service but these proposals have now been dropped.

The UK Government has also confirmed that the £30,000 tax free exemption for termination payments will remain in place. Proposals had been made during the consultation to reduce the tax free amount or link it to length of service but these proposals have now been dropped.