The Government’s Finance Bill 2017 confirms a number of important changes to the taxation of termination payments, with the stated aim of reducing employer abuse and streamlining the applicable regime. In summary:

  • No more PILON distinctions: all payments which are referable to an employee’s notice period, whether paid pursuant to a contractual PILON or not, will be treated as ‘earnings’ and fully chargeable to income tax and employee/employer NICs;
  • Retention of £30,000 exemption: the first £30,000 of any payment which relates solely to termination, including genuine compensation payments in respect of loss of office and redundancy payments, will remain exempt from income tax;
  • Watch for employer NICs: employer NICs will become payable on the balance of termination payments above £30,000 (although no employee NICs will be payable on such balance). Currently payable at a rate of 13.8%, this could lead to significant additional liabilities for employers;
  • Abolition of Foreign Service Relief: FSR will not be applicable (except to seafarers) in any case where the relevant employee is a UK tax resident in the year of their termination; and
  • Clarification on payments for injury: The current tax exemption for termination payments in respect of employee injury or disability will expressly include psychiatric injury, but will not cover awards for ‘injury to feelings’.

The new regime will apply to all termination payments made on or after 6 April 2018. The changes should already be high on the agenda of employers considering exits that will or may extend into next April. Furthermore, given that there will no longer be any tax benefit from omitting PILON clauses from employment contracts, employers may also wish to revisit their employment documentation.