In 2015 the Government announced a consultation on the future taxation of payments made to employees at the end of their employment, and we reported on this here in our bulletin in July 2015. That consultation has now been completed, and the Government has produced draft legislation which incorporates some, but by no means all, of the original proposals. This draft legislation is itself now the subject of a short consultation, with responses due by 5 October 2016. It is proposed that the new rules will come into effect from April 2018.
The biggest single change in the proposals is the removal of the current position for employees who do not work their notice but are instead paid in lieu of that notice. Currently, if there is a pay in lieu of notice clause (PILON) in the contract, then the whole payment is subject to income tax, as the payment is contractually due to the employee. If there is no PILON, then generally the payment of up to £30,000 in respect of notice can potentially be made without deduction as damages for breach of contract. Under the new rules it is proposed that all payments in lieu of notice will be subject to income tax, irrespective of whether there is a PILON or not. This will obviously make those who have no PILON clause in their contract worse off, but it does at least simplify matters and abolish what has always been a fairly arbitrary distinction.
If these changes are implemented, when an employer makes a genuine termination payment to an employee above and beyond the payment in lieu of notice, they will still potentially be able to make that payment without deduction of income tax, up to a maximum of £30,000 in total. These payments will also be free of National Insurance (NI) contributions up to a limit of £30,000, but, unlike now, any payments over £30,000 will in future attract employer’s NI. However, these payments will not attract employee’s NI, irrespective of the amount.
There are also a couple of minor proposed changes relating to some personal injury payments and for Foreign Service relief, but they are beyond the scope of this update.
We will notify you of any changes which come out of this further period of consultation through future ebulletins.
If you would like to talk through a situation you are dealing with, or if you need advice on any aspect of employment law, please contact any member of the Pure Employment Law team (01243 836840 or [email protected]).