Planned Changes to the Taxation of Payments Made on Termination of Employment

September 28, 2016


Planned Changes to the Taxation of Payments Made on Termination of Employment

HMRC and the Government have published draft legislation that is due to come into effect in April 2018. The rationale behind this is set out in paragraph 12 of a consultation document published on 10 August 2016.  Paragraph 12 of the document headed “Preventing manipulation” states the following:

“The government is aware that some employers and employees manipulate the current rules to provide the most favourable tax and NICs outcome by breaking contracts and/or creating circumstances that effectively turn a contractual payment into a non-contractual payment of damages. This can be done by breaching the employee’s terms and conditions, for example by not giving minimum notice the consultation ask how the Government might prevent this manipulation”.

It has long been the position that non-contractual PILONs (payments in lieu of notice) are not taxable if they are non-contractual, for example if there is no PILON clause in  the contract.  In contrast if an employee has a contract that specifies that they are to be paid a period in lieu of notice then that payment is taxable. In all cases if the payment made exceeds £30,000 tax is payable over and above this sum but NICs are not.

The final change concerns payments made to employees for injury to feelings as a result of successful discrimination claims. The present position is unsatisfactory in that in some cases these have been made subject to tax and in some cases they have been non-taxable due to  a difference of judicial opinion as to whether payments for injury to feelings are taxable.  The new legislation coming into force in April 2018 will make it clear that all PILONs are taxable whether contractual or not, NICs will be payable on all sums including those over £30,000 and all damage awards for injury to feelings are taxable.

This is a significant change in this area and shows that no law is ever fixed and set in stone. However, at least the hundreds of thousands of employees who have had the benefit of these payments over the years will not have to make any repayment as legislation of this nature is not and can never be retrospective.

If you need any help with any employment matters Stevyn Jackson and Julian Freeland are on hand to help.

posted by Stevyn Jackson | September 28 2016