New tax rules will mean that income tax and national insurance contributions (NICs) must be paid on all payments in lieu of notice (PILONs) from April 6 2018.
The new rules are complex and although Her Majesty's Revenue and Customs (HMRC) has confirmed that it will soon issue guidance on how they operate in practice, further details published recently have only added to the confusion.
From April 6 2018, if an employer pays a relevant termination award to an employee, it must calculate how much of the award is post-employment notice pay (PENP). 'PENP' is the basic salary that the employee would have received during any unworked period of notice minus any contractual PILON.
PENP is subject to income tax and NICs in full, while the balance of the relevant termination award is eligible for a £30,000 tax exemption and full NICs exemption. For payments made on or after April 6 2019, the employer NICs exemption will be limited to the first £30,000; however, the employee NICs exemption will remain (for further details please see "Making a termination payment after April 5 2018").
Although the legislation suggests that the new rules will apply to any payments made after April 5 2018 irrespective of the date on which the employment terminates, in its February 2018 Employer Bulletin, HMRC stated that the new rules will apply only if:
- the payment is made after April 5 2018; and
- the employment terminates after April 5 2018.
Therefore, the new rules will not apply if the employment terminates before April 6 2018, even if the payment is made on or after April 6 2018.
Under the new legislation, a 'relevant termination award' is any payment or benefit which compensates an individual for the termination of his or her employment (ie, payments and benefits which before April 6 2018 would have qualified for the £30,000 tax exemption), excluding any statutory redundancy pay.
However, the Employer Bulletin suggests that non-statutory redundancy payments will also be ring-fenced and excluded from the relevant termination award. As such, non-statutory redundancy payments will qualify for both the £30,000 tax exemption and NICs exemption.
If this is correct, operation of the new rules could be substantially limited in cases where an employee receives a genuine non-statutory redundancy payment. However, determining a genuine non-statutory redundancy payment is unlikely to be straightforward.
In addition, there appears to be no basis for this in the legislation. Therefore, pending publication of HMRC's full guidance, the ring-fencing of non-statutory redundancy payments should be treated with caution.
HMRC guidance is urgently needed in order to help employers prepare for the new rules. Given that changes to simplify the tax treatment of termination payments have been under discussion for over five years, the complexity and uncertainty of the new rules, a matter of weeks before the legislation is due to take effect, is unhelpful.
For further information on this topic please contact Victoria Goode at Lewis Silkin by telephone (+44 20 7074 8000?) or email (firstname.lastname@example.org). The Lewis Silkin website can be accessed at www.lewissilkin.com.
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