New tax rules will mean that income tax and national insurance contributions (“NICs”) must be paid on all payments in lieu of notice (“PILONs”) with effect from 6 April 2018.
The new rules are complex and difficult to understand and although HMRC has confirmed that it will be issuing guidance on how the new rules operate in practice “soon”, further details on the new rules published earlier this week have only added to the confusion.
What are the new rules?
With effect from 6 April 2018, if an employer pays a “relevant termination award” to an employee the employer has to calculate how much of the relevant termination award is “post-employment notice pay” (“PENP”). PENP is, broadly, the basic salary 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 whilst the balance of the relevant termination award is eligible for the £30,000 tax exemption and full NICs exemption. (For payments made on or after 6 April 2019, the employer NICs exemption will be limited to the first £30,000 but the employee NICs exemption will remain.)
Our overview of the new tax rules can be found here.
When do the new rules take effect?
Although the legislation suggests that the new rules apply to any payments made after 5 April 2018 irrespective of the date on which the employment terminates, in its February Employer Bulletin, HMRC states that the new rules will only apply if:
- the payment is made after 5 April 2018; and
- the employment terminates after 5 April 2018.
In other words, the new rules will not apply if the employment terminates before 6 April 2018 even if the payment is made on or after 6 April 2018.
How are redundancy payments treated under the new rules?
Under the new legislation, a relevant termination award is any payment or benefit which compensates the individual for the termination of their employment (i.e. those payments and benefits which prior to 6 April 2018 would have qualified for the £30,000 tax exemption), excluding any statutory redundancy pay.
The Employer Bulletin, however, suggests that non-statutory redundancy payments will also be ring-fenced and excluded from the relevant termination award. This means that non-statutory redundancy payments will always qualify for the £30,000 tax exemption and NICs exemption too.
If this is correct, it would potentially substantially limit the operation of the new rules in those cases where the employee receives a “genuine” non-statutory redundancy payment. However, deciding what amounts to a genuine non-statutory redundancy payment is unlikely to be straight forward.
In addition, there appears to be no basis for this in the legislation. Pending publication of HMRC’s full guidance, taking the approach of ring-fencing non-statutory redundancy payments should therefore be treated with caution.
HMRC guidance is needed as matter of some urgency to help employers prepare for the new rules. In view of the fact that changes to simplify the tax treatment of termination payments have been under discussion for over 5 years, the complexity and lack of certainty on the new rules, a matter of weeks before the legislation is due to take effect, is unhelpful.