The government wants to simplify the way that termination payments are taxed.

This is to ensure that neither employers nor employees are able to manipulate such payments. Earlier this month, the government published its proposals, which are intended to come into force in April 2018.

So, what's changing?

From April 2018, the distinction between contractual and non-contractual payments in lieu of notice (PILON) will be removed. This means that all PILONs will be subject to tax and NICs as earnings. The distinction between contractual and non-contractual termination payments will be retained.

Employers will no longer have the option of making a "damages" payment in respect of an employee's notice period where there is no PILON clause, which can be a useful negotiation tool in settlement discussions.

All other post-employment payments which would have been treated as earnings if the employee had worked their notice period will be subject to tax and Class 1 NICs.

The government intends that the employee will be treated as having worked their notice, regardless of whether that actually happens. This will also include accounting for the cash value of benefits in kind (e.g. company car, gym membership) and any bonuses which would have been received during the notice period.

The £30,000 tax free exemption for payments relating directly to the termination of employment will be retained, whilst the rules for income tax and employer NICs will be aligned.

What impact could these changes have?

It is probable that the tax free payments over £30,000 become less common and that there will be a higher cost to the employer with additional NICs. In addition, as there will no longer be any distinction between contractual and non-contractual PILONs for tax purposes and, there may be no benefit in leaving PILON clauses out of contracts of employment which already attract tax.

For more information, please contact Michael Delaney on 01923 208 817 or at mdelaney@vwv.co.uk

This publication is for guidance only. We would always recommend that you take legal advice on your particular circumstances.