Taxation of termination payments

A new tax treatment of payments made on termination of employment will come into effect in the next year.

From 6 April 2018:

  • If an employer elects to pay in lieu of giving the employee notice, then this payment in lieu of notice (PILON) will be subject to income tax and employer and employee National Insurance contributions (NICs) – irrespective of whether there is a PILON clause in the contract of employment.
  • The £30,000 tax-free allowance will only be available for any termination payment over and above notice pay. This is in contrast to the current position, where PILONs on termination of employment may benefit from the £30,000 income tax exemption if the employer does not have a contractual right to pay in lieu of notice (subject to HMRC not concluding that there is an auto-PILON).
  • Clarification that ‘injury to feelings’ awards made in discrimination and whistleblowing detriment claims cannot be paid tax free as they do not meet the definition of ‘injury’. Psychiatric injury caused by the discrimination can still benefit from being paid tax free.

From 6 April 2019:

  • Termination payments above £30,000 will become subject to employers’ NICs but not employees’ NICs.

This will therefore give all employers an extra year in which to make payments above £30,000 free of employers’ NICs which, at 13.8%, is quite significant.