Changes to the Taxation of Termination Payments

The government has published a consultation document on the simplification of the tax and National Insurance treatment of termination payments.

The proposed changes include:

  • All payments in lieu of notice (“PILONs”) will be fully taxable regardless of whether there is a PILON provision in the employment contract.
  • Employer National Insurance contributions will be payable on the balance of any termination payment above £30,000. Termination payments will remain free of employee National Insurance contributions.
  • Payments in respect of injury to feelings will be taxable. This resolves a current divergence of judicial opinion on the matter.
  • Tax free payments in respect of injury or disability may only be made in respect of any injury of a physical or psychological nature which means that the employee is not able to perform their job properly.
  • The £30,000 tax free exemption for termination payments will remain in place.

The proposed changes are intended to come into force in April 2018 and should hopefully alleviate the ambiguity and confusion for businesses regarding termination payments.

If you have any questions arising from this article or would like further information on termination payments and UK employment law, please get in touch with a member of our Employment team.