Are you aware of the recent changes to the taxation of termination payments?

There is a common misconception that the first £30,000 paid to an employee on the termination of their employment is free from income tax. In actual fact the tax treatment depends on exactly what the termination payment is comprised of.

From 6 April 2018, all payments in lieu of notice (“PILONs”) will be chargeable to income tax and Class 1 National Insurance (“NIC”) regardless of whether or not the PILON is contractual. Under old rules certain non-contractual PILONs were covered by the £30,000 income tax exemption. All employees will pay income tax and Class 1 NICs on the amount of basic pay that they would have received if they had worked their notice in full. This means that all employees will suffer the same income tax and NIC treatment on PILONs regardless of how their employment contract is drafted.

Foreign Service Relief on termination payments has been removed for UK residents. The measure applies to termination payments received after 13 September 2017 in relation to employments ending from 6 April 2018. The measure does not apply to seafarers. Under the old rules, where an employee worked abroad for all or some of their employment, compensation for termination could be totally or partially exempt from UK income tax depending on the amount of time that the employee had worked overseas.

From 6 April 2019, employers will pay Class 1A NIC on the part of a termination payment that exceeds £30,000.

If you would like to discuss termination payments in more detail please speak to a member of our tax team or get in touch by email: [email protected]