Taxation on Termination Payments- Changes from 6th April 2018
From 6 April 2018 a new regime will apply to payments made in lieu of notice (PILON) on termination of an employee’s employment. The effect of the change will be that HMRC will tax as earnings the basic pay that an employee would have earned had they worked their notice in full, irrespective of whether there is a PILON clause in the employee’s contract. PILON clauses are often included in contracts of employment to ensure that an employer can terminate employment immediately without being in breach of contract, thereby preserving the enforceability of restrictive covenants. The old rules meant that if there was no PILON in a contract then the amount equal to “notice” could be treated as a “damages” payment and up to £30,000 could be paid tax free as it was not deemed contractual. The contract wording is no longer an issue; all “notice” payments attract tax deductions from 6 April 2018.
Under the new rules, which were introduced by Section 5 of The Finance (No. 2) Act 2017, HMRC requires employers to split a termination payment into two parts: the amount treated as earnings and the amount that will attract the £30,000 tax-free exemption.
This means that when calculating tax on an employee’s pay in lieu of notice, the part of the payment which must be treated as earnings includes everything apart from any statutory redundancy pay or a non-contractual loss of office payment.
HMRC has now clarified that where a contract of employment ends before 6 April 2018 the old rules for termination payments will apply.
Posted on 03/22/2018 by Ortolan
