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Taxation of Employment Termination Payments

Posted: 23rd February 2018
Written by: Oliver Hebon - Solicitor - Newtons Stokesley Office

In April 2018, forthcoming changes are likely to be introduced which will change the way termination payments are treated for tax purposes when an employee leaves their employment.

Oliver Hebden Solicitor Newtons Stokesley

Both employers and employees alike might commonly (but incorrectly) assume that the first £30,000 paid to an employee on termination of their employment will never attract tax or National Insurance. However, assessing whether a termination payment (or an element of it) is exempt from tax is not that straightforward and the changes being made are designed to simplify the position.

Very broadly, where there is no contractual payment in lieu of notice (PILON) clause, an employer may currently be able to pay up to £30,000 of a notice payment free of tax. However, this is certainly open to challenge by HMRC and there are complicated factors which it will take into account when determining whether a PILON (and similar termination payments) ought to be taxed. However, by April 2018 all PILONs will be subject to deductions for income tax and National Insurance contributions. Similarly, any employers National Insurance contributions (but not employee NI) will also be payable on any part of a termination payment that is taxable.

Although the changes may indeed simplify the process they may not be welcomed by employers by the time April arrives, particularly if an employer has (until then) routinely used damages payments as a method of making payments which previously did not attract tax. Whilst the £30,000 tax exemption limit will still apply, the opportunities to utilise it could shortly become more limited for employers. Employers should therefore carefully consider (and obtain advice where appropriate) on the timing of any proposed termination and the possibilities which may be available to explore.

For more information contact our employment law team on: