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Changes to Taxation of Termination of Employment Payments - from April 2018

HM Revenue & Customs has published draft legislation changing the taxation of termination payments, intended to come into force April 2018. The main changes are:

  • make all PILONs (payments in lieu of notice) taxable, even if  there is no pay in lieu of notice clause in the employment contract. At the moment, the view is that if there is no pay in lieu of notice clause in the employment contract, notice pay can be paid as damages and is thus not taxable.  This is a valuable benefit for departing employees and is often important in negotiations.
  • require payment of employer NICs on sums over £30,000 (not currently payable). This will add to the cost of termination payments for employer and will need to be factored into calculations
  • ensuring payments for injury to feelings are subject to tax (there is currently a conflict of judicial authorities on this point). Injury to feelings payments arise in successful discrimination claims.

The wording of the draft legislation is open for consultation until 5 October 2016, but the principles are unlikely to change. For now, employers should ensure that they have properly considered the taxation of termination payments to comply with existing rules.

For further information, please contact Jacqueline McCluskey.

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