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On the horizon: tax treatment of termination payments expected to change from April 2018

Details

The tax treatment of payments in lieu of notice (PILONs) is likely to change in April 2018. The original proposals failed to make the Finance Act earlier this year, because of the snap election. However, the Government has taken the highly unusual step of publishing a new Finance Bill (No.2) 2017 which includes provisions which, subject to parliamentary approval, change the tax treatment of certain termination payments from the 2018/19 tax year.

In summary (as currently drafted) the proposed changes are:

  • all PILONs are taxable as earnings (whether contractual or not)
  • 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 there was no contractual PILON
  • the amount of notice that the employee would have received is the minimum amount required by statute or the contract, and there is a complex formula for determining what amount constitutes basic pay for the unworked notice period
  • the £30,000 cap will apply to NIC as well as for income tax
  • the exemption for PI damages will no longer include compensation for ‘injury to feelings’
  • the removal of foreign service relief (although broadly speaking the status quo will be maintained for seafarers)

Comment: Many employers choose not to include a contractual PILON in their employment contracts because the favourable tax treatment of non-contractual PILONs makes it easier to negotiate a settlement on termination. However, because the tax advantages of not having a contractual PILON clause will be removed from April 2018, contractual PILONs may increase in popularity.

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