March 26, 2018
April 2018 brings changes to the Tax on Termination Payments
Following consultation by the Government from 6 April 2018 changes will come into force in the way termination payments are treated in regards to tax.
Payments in lieu of notice (PILON)
As it currently stands if you do not have a contractual PILON any payment made in relation to an employee’s notice entitlement has been regarded as damages for a breach of contract and the first £30,000 can be paid tax-free. All contractual PILON’s are subject to tax and National Insurance Contribution deductions.
From April 2018, all payments related to a PILON will be taxable and subject to National Insurance contributions, whether contractual or non-contractual.
In another change, any bonus that the employee would have received during their notice period or any another time which relates to the time before their employment ended, or the time that would have been their notice period, will be subject to tax and National Insurance Contribution deductions.
The limit of the first £30,000 of a ex-gratia payment will continue to be tax free, however, the employer will be required to pay National Insurance Contributions for any balance over £30,000. This will therefore increase the cost of termination payments for employers.
Injury to Feelings
From April 2018, the exemption from tax for payments for injury and disability will not apply to injury to feelings, unless they relate to psychiatric injury or other recognised medical conditions.
Article by Lucy Watson, Employment Specialist