On 10th August 2016, the government published its response to the consultation on simplifying tax and NICs on termination payments, together with draft legislation for further consultation. The government has indicated that, from April 2018, it will:

  • not distinguish between contractual and non-contractual payments in lieu of notice (PILONS). All PILONs will be treated as earnings subject to income tax, employer and employee NICs. There will no longer be any reason not to include a PILON clause in an employment contract.
  • retain the current exemption from income tax and employer and employee NICs for termination payments up to threshold of £30,000. However, rules for income tax and employer NICs will be aligned so employer NICs will now be payable on termination payments above £30,000, which are currently only subject to income tax.
  • remove foreign service relief (with one exception).
  • clarify that injury to feelings payments cannot benefit from the exemption for injury payments.

Note that some of the original proposals set out in the July 2015 consultation have been dropped, including:

  • introducing a variable threshold for the current £30,000 exemption based on length of service;
  • limiting the £30,000 exemption to payments made on redundancy; and
  • removal of the exemption for legal costs.