Last Summer the Government consulted on proposed changes to the tax treatment of termination related payments. This included proposed changes in relation to non-contractual payments in lieu of notice (“PILONs”), the £30,000 tax exemption on certain termination payments, and the tax treatment of legal fees which are often paid when a departing employee signs a settlement agreement. Some of the proposals were quite substantial, and we felt would make the law more complicated than it already is, so we responded to the consultation and argued on our clients’ behalf for a simpler approach to taxing termination payments.
The Government has now published its response to the consultation as well as draft legislation which is expected to come into force in April 2018, and there is mixed news for employers.
The good news is that:
However, in future:
PILONs – Currently, an employer may pay up to £30,000 of notice monies free of tax where there is no contractual PILON. The payment is treated as damages for breach of contract. However, HMRC can challenge whether or not the first £30k of the PILON is tax free and it might argue that an “auto-PILON” is implied into the employment contract and then treat the payment as taxable. The risk of HMRC deciding that there is an “auto-PILON” increases where an employer habitually makes tax-free PILONs rather than requiring employees to work out their notice or placing them on garden leave. By making all PILONs taxable (whether or not they are contractual) simplifies matters, but it will disadvantage those employers – and their employees – who seek to use damages payments for breach of contract as a way of paying termination payments free of tax.
Employer NICs – The current position is that no National Insurance contributions are paid on termination payments where £30k has been paid free of tax. This can amount to a significant cost saving, particularly for employers. The Government has decided that employers, but not employees, will have to start making National Insurance contributions. Employers who propose to make substantial termination payments in the first half of 2018 will need to plan carefully when those payments are made in order to try and beat the date on which employer National Insurance contributions will become payable.
Foreign service relief – In very broad terms, employers who have worked abroad for a period of time can qualify for full or partial relief from tax on their termination payments. However, this relief will be abolished.
What steps should HR be taking now?
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