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End of the line for some termination payments

From April 2018 there will be changes to the taxation of termination payments. This area has become more and more difficult to manage for employers as to assessing which payments, payable under a settlement agreement are tax-free, if any. At present, payments due under an employee’s contract should be subject to tax and National Insurance Contributions (NICs) but identifying which these are is not always straight forward as contractual terms may be written, customary or implied.  A specific area of uncertainty is PILONs as currently if you do not have a contractual obligation to make a PILON, any payment made in respect of an employee’s notice entitlement is generally regarded as ‘damages for breach of contract’ and the first £30,000 can be paid tax-free (and no NICs are due regardless of the sum paid).

In order to bring more clarity in this area, from April 2018, all PILONs will be taxable and subject to NICs.  In particular from April 2018, what you call a payment will not change the nature of it and so post-employment bonus payments for instance, are likely to be caught if there is an entitlement arising even if this has notionally been waived and replaced by an ‘ex gratia’ payment.

Although the proposals are intended to simplify the taxation of termination payments, there are now complex and prescriptive rules to be applied in identifying what sums now fall to be taxed. This means some payments that currently fall into the £30,000 exemption will be subject to tax and NICs.

For now, the first £30,000 of a non-contractual termination payment is tax-free, with any balance over £30,000 subject to tax. No employee or employer NICs are due.  From April 2018 employer NICs will be due in relation to the balance over £30,000 but there will be no change as regards employee NICs due.

The position is changing so best advice is to take advice!



Date: 20th March, 2018
Author: Jacqui Gudgion


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