Taxing PILON Payments
For years it has been possible to make a payment in lieu of notice to employees whose contract of employment does not contain a pay in lieu of notice (PILON) clause without deducting tax and NICs. For employments terminating on or after 6 April 2018 there will no longer be this option. Whether the contract reserves a right to pay in lieu of notice or not, an amount equivalent to the notice pay due to the employee will have to be subject to tax and NIC deductions. This reduces the opportunity for employees to negotiate tax efficient settlements with employees and increases revenue for HMRC.
NICs on Termination Payments
At the moment, employees can enjoy up to £30k tax and NIC free as a termination payment following the termination of employment. Both employers and employees also benefit from no NICs on termination payments over £30k (although such payments are taxable over £30k).
From 6 April 2018, tax and employer’s NICs will be payable on termination payments to the extent that they exceed £30k. This means that an extra 13.8% of termination payments over £30k will be payable to HMRC in respect of employments terminating on or after 6 April 2018.
Foreign Service Relief
Foreign service relief, which enables employees who meet certain qualifying rules about overseas service, to receive termination payments of more than the usual £30k tax free, will be removed from 6 April 2018.
Injury to Feelings
The tax exemption for injury to feelings payments is also being removed.
Power to Vary the £30k Threshold
The £30k tax free threshold has been the same for as long as I can remember. As salaries have increased, fiscal drag has reduced the value of the £30k payment in real terms. A new power to vary the £30k limit has been introduced. Will it be used to vary the £30k upwards? The power allows a change upwards or downwards. Whether there’s a change and in what direction, we’ll have to wait and see!
Further details of all these tax changes can be found here.