Provisions for termination payment tax changes
From 6 April 2018, all payments in lieu of notice (PILONs) equivalent to the amount of basic pay will be taxable as earnings, i.e. subject to tax and NICs, regardless of whether there is a PILON clause in the employee’s employment contract. As such, employees will pay income tax and Class 1 NICs on the amount of basic pay they would have received if they had worked their notice in full, even if there is no contractual PILON clause in their employment contract. This contrasts with the current position where PILONs on termination of employment benefit from the £30,000 income tax exemption if the employer does not have a contractual right to pay in lieu of notice and there is no “automatic” practice of paying in lieu.
What was not entirely clear was whether this change to the taxation of termination payments applies to termination payments made on or after 6 April 2018 or only to employment terminations taking place on or after 6 April 2018. HMRC has now published Employer Bulletin 70 in which it has clarified that the change applies “to payments or benefits received on or after 6 April 2018 in circumstances where the employment is also ended on or after 6 April 2018”. In other words, the tax change only has effect for payments made in, and relating to terminations occurring in, tax year 2018/19 and subsequent tax years.
Employers will now need to start factoring in the new rules when considering the timing and negotiation of termination payments. In addition, employers should include a standard PILON clause in their employment contracts from April 2018 as there will be no tax advantage of excluding the clause.
Latest News
- Tax Diary May/June 2024
18/04/2024 - More...
1 May 2024 - Due date for corporation tax due for the year ended 30 July 2023. 19 May 2024 - PAYE and NIC deductions
- Payrolling employee expenses and benefits
18/04/2024 - More...
Employers can register on a voluntary basis (before the start of the tax year) to report and account for tax on certain
- Changes to Scottish Income Tax rates 2024-25
18/04/2024 - More...
A reminder of the changes to Scottish Income Tax rates for the 2024-25 tax year. It was announced as part of the
Newsletter
With our newsletter, you automatically receive our latest news per e-mail and get access to the archive including advanced search options!