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Taxation of termination payments - what's changing?
Pure Employment Law > News > Taxation of termination payments – what’s changing?

Taxation of termination payments - what's changing?

26 February 2018 by Peter Stevens
Taxation of termination payments - what's changing?

With effect from 6 April this year, there are significant changes being made to the taxation of payments made to employees in lieu of their contractual notice.

Under the existing rules, the taxation of a payment in lieu of notice (PILON) has been a complicated area, and one often misunderstood by employers and employees alike. Basically, if an employer made a PILON to an employee in accordance with an express or implied contractual right to do so, then the payment was subject to tax and NI.  However, if there was no contractual right for the employer to make a PILON, then if they did terminate the employment with immediate effect and then pay the employee what they would have earned had they worked their notice, that payment was treated as damages for breach of contract and was therefore not subject to tax (at least for the first £30,000).

From April 2018, all PILONs, whether contractual or otherwise, will be subject to tax and NI. In many ways this simplifies the situation, but clearly where there is no PILON provision in the contract, the cost to both employer and employee will rise.

The entitlement to receive up to £30,000 without deduction of tax or NI on the termination of employment remains. There is still going to be the requirement that this payment has to be non-contractual, but that is not changing.  However what is changing, from 6 April 2019, is that employer’s NI (currently 13.8%) will be payable on any amount of ex-gratia payment to the outgoing employee which is in excess of the £30,000 exemption.

The new rules make it clear that it is the employer’s responsibility to apply the correct tax treatment to the termination payment. The employer will therefore be subject to any unpaid tax, penalties and interest if the payment is not treated correctly.

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 enquiries@pureemploymentlaw.co.uk).

Please note that this update is not intended to be exhaustive or be a substitute for legal advice. The application of the law in this area will often depend upon the specific facts and you are advised to seek specific advice on any given scenario.