Our website uses cookies to enhance the visitor experience (what's a cookieCookies are small text files that are stored on your computer when you visit a website. They are mainly used as a way of improving the website functionalities or to provide more advanced statistical data.). Are you happy for us to use cookies during your visits?
Please note: continuing without making a choice equates to giving us your consent, which you can withdraw at any time via our cookies policy page.

 

All change for termination payments


Newsletter issue - November 2017.

As confirmed in the 2017 Spring Budget, the tax rules governing termination payments will change from 6 April 2018.

The term 'termination payment' is typically used as a generic summary for a lump sum payment, which is normally (but not always) made to an employee at the time the employment comes to an end. The current rules governing the taxation of termination payments are complex and over recent years, have been subject to manipulation by some employers seeking to minimise income tax and NIC liabilities. The forthcoming changes seek to clarify the rules, particularly in relation to the existing £30,000 tax-free exemption for genuine redundancy payments.

PILONs

Under the existing rules, it is necessary to look at whether payment in lieu of notice (PILON) is the contractual right of the employee. Broadly, if a contractual right exists, it will be fully taxable as earnings. This 'contractual right' element has provided a degree of scope for manipulating arrangements to take payments outside the taxable earnings boundaries - and in doing so, for potentially escaping the charges to tax and NICs.

From 6 April 2018, all PILONs, rather than just contractual PILONs, will be treated as taxable earnings. Therefore, under the new rules, all employees will pay tax and Class 1 NICs on the amount of basic pay that they would have received if they had worked their notice in full, even if they are not paid a contractual PILON. This means the tax and NICs consequences are the same for everyone and it is no longer dependent on how the employment contract is drafted or whether payments are structured in some other form, such as damages.

Aligning income tax and NICs

The existing £30,000 income tax exemption for genuine terminations payment will remain. However, the National Insurance Contributions rules will be aligned with the tax rules so that, from 6 April 2018, employer NI contributions will be payable on the elements of the termination payment exceeding £30,000. The employer NIC charge will be achieved through Class 1A contributions.

Going forward

As with most anti-avoidance measures, it is likely that HMRC will monitor how these changes are operated and, if perceived misuse of the rules is detected, further changes can be expected.

Although the existing £30,000 exemption will remain intact, the circumstances in which the exemption can be applied will, in essence, be restricted to genuine redundancy situations. This will remain a contentious area on which specialist advice will still be recommended.

 

 

Request a callback from Mapperson Price

Our philosophy is to provide a professional friendly service to local people, including employed, self-employed and small to medium sized businesses. Fill in our callback form and we'll contact at a suitable time for you.

The partners are supported by staff with a range of experience in accounts, taxation, payroll, and company secretarial work to support the various services the firm offers.

REQUEST CALLBACK

We always aim to get it right first time, every time, we'll respond to you as soon as possible after your form has been received by us.

 


Newsletter Icon

Newsletter Sign up

Handy tax tips delivered directly to your email inbox