At the moment contractual payments in lieu of notice are subject to tax and NIC deductions. In the absence of a contractual right to make a payment in lieu of notice, such a payment is generally regarded as damages for breach of contract, and can be paid without deduction of tax up to the £30,000 threshold.

However, any part of a termination payment paid on or after 6 April 2018 which represents ‘post employment notice pay’ will not benefit from the current £30,000 exemption.

If an employee is not required to work their full notice (whether contractual or statutory and for whatever reason) HMRC will assume that an element of any termination payment includes notice pay and will classify it as ‘post employment notice pay’ which shall be treated as earnings and subject to tax and NIC deductions.

This will certainly be something for employers to bear in mind when negotiating exits and preparing settlement agreements.