Maz Dannourah

Senior Associate

Employment and HR

Update: changes to the taxation of termination payments

Maz Dannourah

Many employers make use of termination payments in the course of negotiating the exits of staff for varying reasons.  Typically, a departing employee may be offered a payment on termination which is paid under a settlement agreement and may cover entitlements such as notice pay, redundancy pay and ex gratia payments.

Under the banner of simplification, the Government has made changes to the tax treatment of termination payments.  Many are sceptical of the suggestion that the new rules simplify the taxation of termination payments as much as they simply increase the tax levied from such payments.

For termination payments due to be paid on or after 6th April 2018 the main change that will apply is as follows:

  • Any payment in lieu of notice will need to be taxed as earnings.  The employer will need to calculate the extent of any unexpired notice the departing employee would have been entitled to and ensure that the payment for the equivalent period is subjected to tax and national insurance contributions. This applies whether or not there is a payment in lieu of notice clause (“PILON”) in the contract of employment

Many employers, knowing of the introduction of this change, have for some time sought to tax any payment which could be deemed to be notice or any part of a termination payment which is the equivalent of notice paid in lieu.  In those cases there is not likely to be any significant change to future termination payments as a result of these new rules.

Where employers will need to make changes is where they routinely pay “notice” as part of a termination payment on a gross basis due to the absence of a PILON clause in the employment contract.  This was typically done to take advantage of the £30,000 tax exemption for termination payments but will effectively end after 6th April 2018 given the need to tax any payment in lieu of notice.

If you're interested in any of the topics raised in this article, or for further information, please contact Maz. Alternatively, you can call to speak to one of the team on 0115 9888 777. 

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