Termination Payments – changes to the tax regime

Added On: 9th November 2017

Termination Payments – changes to the tax regime

With effect from the 2018/2019 tax year, provisions are being introduced to tighten and clarify the income tax treatment of termination payments.

As result, employees will have to pay income tax and Class 1 NICs, and employers will also have to pay NICs , on the amount of basic pay that would have been earned if the employee had worked their notice in full, even if the employer has no contractual right to pay in lieu of notice. This differs from the current regime, where employers are able to make payments in lieu of notice (PILONs) on termination of employment, up to £30,000, free of income tax and NI contributions if they do not have a contractual right to pay in lieu of notice.

The existing £30,000 income tax exemption will be retained and employees will continue to benefit from an unlimited employee NICs exemption for payments associated with the termination of employment.

Since there will no longer be a tax advantage from April 2018, it would be advisable to review your contracts of employment, and to consider including a PILON clause if you don’t already do so. There is now a real benefit in having such a clause, because where PILONs are made without a contractual PILON clause, any restrictive covenants contained in the contract are unenforceable. Consequently, there will only be a potential downside of not including a PILON in the contracts once these changes come into force.