Tax Efficient Termination Remuneration

Taxation of Termination Payments: ‘All change’
HMRC has, for a while now, been trying to find a way around allowing the £30,000 tax free termination payment to employees. This may, in part, be from the knowledge that there have been occasions where some employers have excluded the inclusion of ‘payments in lieu of notice’ (PILON) from their contracts of employment, such that these payments will be made tax free. It is therefore no real surprise that the Government has now published proposals to change the tax treatment of termination payments.

Currently where a PILON is included in the contract of employment it is, like other wages payments, a contractual sum and is taxable.
Where there is no contractual entitlement for a PILON it may be tax-free where the total non-contractual termination payment, (whether redundancy, ex gratia or a non-contractual PILON) is tax-free up to £30,000; In these circumstances the element of any such payment above £30,000 currently still benefits from NIC exemptions. However, this is all set change from April 2018 as the Government proposes that:

• All PILONs, whether included in the employment contract or not, will be taxable, with genuine redundancy and ex-gratia payments remaining tax-free in total up to £30,000.

This means that, unlike now, payments made that are greater than £30,000 will be subject to not just PAYE but National Insurance contributions also.

Disclaimer - All information in this post was correct at time of writing.