Changes to termination payments
May 04, 2018
If you make an employee redundant, or grant them a pay-out at the end of their employment with you, be sure to take great care. Not only are there employment law considerations, there are also important tax implications, and this is an area where professional advice is strongly recommended so you avoid unnecessary pitfalls. Be aware that the tax treatment of these kinds of payments changed on 6 April 2018, and further changes are coming into effect in 2019.
Pay In Lieu of Notice
If you’re an employer, you now need to pay Income Tax and Class 1 National Insurance Contributions (NICs) on an element of all termination payments from 6 April 2018, whether or not they are contractual payments. The element that is now chargeable to Income Tax and NICs is the amount of the termination payment that represents payment in lieu of notice (PILON), which is sometimes referred to as “garden leave”.
The first £30,000 of genuine ex-gratia payments continues to be exempt from Income Tax and National Insurance. This £30,000 limit includes statutory redundancy payments. Any payments made in excess of £30,000 are taxed as employment, but there are currently no NICs due on such payments. It was originally proposed that employers’ NICs would be applied to such payments from 6 April 2018, but the delayed introduction of the National Insurance Contributions Bill means that employer NICs on termination payments above £30,000 will now only take effect from 6 April 2019.
Periods of Foreign Service
In addition, Foreign Service relief on termination payments was removed for all UK residents – apart from seafarers – from 6 April 2018. Previously, this provided a further exemption from Income Tax and NICs depending on the period of time spent working abroad.
UK residents whose employment ends after 6 April 2018, and who receive a payment or benefit relating to that termination which is made after 13 September 2017, will now no longer be eligible for tax relief for any period of foreign service undertaken as part of that job.
Please get in touch if you would like to discuss the tax treatments of termination payments and we’ll happily help.