The government has published its response to its 2015 consultation on simplifying the taxation of termination payments, together with draft legislation for further consultation.
From April 2018, tax and NICs charged on termination payments will change as follows:
What does this mean for employers?
The distinction between contractual and non-contractual PILONs will be removed. This will mean that all payments in lieu of notice will be subject to income tax, employer's NICs and employees' NICs.
However, the exemption from income tax and employers' and employees' NICs for termination payments up to £30,000 will be retained.
Employers' NICs will be payable on payments above £30,000.
Foreign service relief will be abolished, except in relation to seafarers.
The exemption from tax on payments for injury will not include injury to feelings, except where this amounts to a psychiatric injury or a recognised medical condition.
The most noticeable difference from April 2018 will be in relation to payments in lieu of notice. Currently, these can come within the £30,000 tax free exemption unless the employer has a contractual right to make a payment in lieu of notice. The change will not be popular with employees, but will make the system less complicated.