Changes to the taxation of termination payments

Changes to the taxation of termination payments

New rules regarding the taxation of termination payments have now come into force, meaning that all employers will need to consider Income Tax and Class 1 National Insurance contributions (NICs) on an element of all termination payments from 6 April 2018.

An employee is generally entitled to notice when their employment contract is terminated. If there is a payment in lieu of notice clause (PILON) in the employment contract, the employer is entitled to terminate the employee’s employment immediately and pay them the sum specified by the contract. The PILON will normally be paid subject to Income Tax and National Insurance contributions (NIC). This continues to be the case after the new changes.

However, where an employee is dismissed with no PILON in their contract, employers will have to deduct Income Tax and Class 1 NICs from any amount which equates to “post-employment notice pay” (see below). Previously, the ‘damages’ awarded on such a termination would have been free of Income Tax and NIC, provided that the aggregate value of all qualifying termination payments did not exceed £30,000.

The “post-employment notice pay” will essentially be the basic salary the employee would have earned had they remained in employment for the notice period. Other termination payments may still potentially benefit from the aggregate tax-free £30,000 exemption, subject to the usual exceptions.

In addition to the above, foreign service relief on termination payments will be removed for all UK residents, apart from seafarers.

UK residents whose employment ends after 6 April 2018, who receive a payment or benefit in connection with that termination made after 13 September 2017 will not be eligible for tax relief for any period of foreign service as part of that job.

If you would like any additional information regarding termination payments please don’t hesitate to get in touch.

Steve Crompton
Partner – Head of Tax
direct dial: 01942 292541
mobile: 07790 840394

Chris Barrington
Tax Partner
direct dial: 01942 292505
mobile: 07730 436070