UK Employment Alert: Changes To The Taxation Of Termination Payments

By and on September 9, 2016

The government has published its response to feedback received on its proposals to simplify the taxation of termination payments, expected to come into force in April 2018.

The following table sets out the main proposals and the effect these will have on employers. Importantly, there is no change to the current £30,000 tax free allowance.

 

Proposal Change Effect
1. Termination payments above £30,000 to be subject to employer National Insurance contributions (NICs). Currently, termination payments above £30,000 only attract income tax, not NICs.
While employer NICs will be payable under the proposal, employee NICs won’t.
At 13.8%, the addition of employer NICs could add a not inconsiderable cost to paying a termination payment exceeding £30,000.
2. All payments in lieu of notice (PILONs) (contractual and non-contractual) to be taxed as income.

Currently, contractual and non-contractual PILONs are taxed differently.

Contractual PILONs (that are provided for in the employment contract) are treated as earnings and subject to income tax and both employer and employee NICs.  Non-contractual PILONs, which are paid in the absence of the contractual right to do so, are subject to income tax, but not NICs.

It isn’t always straightforward to determine whether a PILON is contractual or not given that HMRC can also have regard to the regularity with which the employer pays PILONs.

This clarification is actually welcome given the differences in opinion which can arise when negotiating a settlement agreement.

3. Injury to feelings awards (such as for harassment or discrimination) will not qualify for general injury tax exemptions.

There is an exemption to income tax on termination payments, in addition to the £30,000 threshold, when a payment is made because of death, disability or injury of the employee.

It is currently unclear whether injury to feelings awards qualify for the exemption as there have been contradictory decisions on the point.

This proposal would provide additional welcome clarity, but in common with all 3 proposals, means increased cost to employers.

These changes are likely to come into force in April 2018. Given that items 2 and 3 in the table clarify points that are currently argued either way, a prudent employer might want to veer on the side of caution when considering those issues before April 2018.

Lauren Goda (Trainee) contributed to this article.

James RossJames Ross
  James Ross advises clients on a broad range of international and domestic corporate/commercial tax issues, including corporate restructuring, transfer pricing and thin capitalisation, double tax treaty issues, corporate and structured finance projects, mergers and acquisitions, and management buyouts. He counsels US groups in the structuring of UK and European inbound investments, including in relation to redomiciliations and providing advice on technical issues in the context of revenue investigations and statutory audits. He is particularly adept at advising on intellectual property holding structures. Read James Ross' full bio.


Katie ClarkKatie Clark
Katie Clark has significant experience advising on all aspects of contentious and non-contentious employment matters. Katie’s client base spans multiple business sectors and includes global corporations, financial institutions, FTSE 100 companies, manufacturing companies, service providers and start-ups. Katie is noted for her commercial approach to assisting clients to deal with employment issues ranging from day-to-day employee relations, to negotiating public limited company (PLC) board director contracts and significant business restructuring. Read Katie Clark's full bio.

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