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Spring Budget 2017 - Changes to taxation of termination payments

There is a generally widespread (frequently mistaken) belief that the first £30,000 of any payment made in connection with termination of employment is tax-free. The confusion around the entitlement and the complexity of the legislation lead to a number of anomalies and the Government is now "simplifying" the position.

This includes:

  • Treating all payments made in lieu of notice (PILONs) taxable as earnings, subject to tax and National Insurance.  This means that there will be no distinction between contractual and non-contractual payments for taxation purposes. This will include sums below £30,000
  • Requiring employers to tax the equivalent of an employee’s basic pay if an employee is released without working notice
  • The removal of foreign service relief for employees who have spent time working outside of the UK

The first £30,000 of other termination payments will remain exempt from Income Tax and National Insurance. Whilst currently, it is only tax that is payable on the element exceeding £30,000, legislation will be introduced to subject the excess to employers’ National Insurance Contributions (NICs). The employee will, however, still receive the whole termination payment without being subject to employee NICs.

The changes apply from 6 April 2018.

If you would like to discuss this further please get in contact with Tax Director, David Hadley or your usual Mercer & Hole contact.



Date: 9th March, 2017
Author: David Hadley


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