Taxing Termination Payments

In August, the Government published its response to the consultation on the simplification of taxation on termination payments with draft legislation to implement its planned reforms.

The most significant proposal, due to be introduced in April 2018, is the removal of the distinction between contractual and non-contractual payments in lieu of notice (PILONs) with the result that all PILONs will be treated as earnings subject to income tax and employer and employee National Insurance Contributions. The new provisions will provide a formula for calculating how much of a termination package equates to the amount the employee would have earned during the contractual notice period, plus the value of any bonus or benefits in kind the employee would have received during that period. These sums will be subject to tax and NICs as if they were income, regardless of what is stated in the employment contract. The balance of the package will be treated as a termination payment, and as is currently the case, will be exempt from income tax and NICs up to £30,000. As well as being subject to income tax, amounts over £30,000 will also become subject to employer NICs.

In addition, the reforms will make clear that payments for injury to feelings will be subject to tax and NICs rather than possibly falling within the exemption for injury payments, unless the injury is a psychiatric injury or recognised medical condition.