Following a review of the taxation of termination payments in
July 2014, the Office for Tax Simplification concluded that the
current rules around taxation of termination payments are complex
and confusing. This resulted in the government launching a
consultation in July 2015 on how termination payments are treated
for the purposes of tax and National Insurance contributions
(NICs). Its response to the consultation has now been published
together with draft legislation designed to implement the changes
it has decided to make. The exact wording of the draft legislation
is open for consultation until 5 October 2016.
The following changes are expected to take effect in April
The £30,000 income tax
exemption for genuine termination payments will be retained and
employees will continue to benefit from an unlimited employee NICs
Currently payments in lieu of notice
(PILONs) are taxable if there is a clause in the employment
contract which permits the making of such payments. If there is no
such clause and no custom and practice of paying PILONs, the
payment may be categorised as damages for breach of contract and
therefore be paid free of tax and national insurance. The
government has said that the current position is too complex and
open for manipulation. To simplify this, all
PILONs will now be subject to tax and national insurance as
Employers will be required to pay
employer NICs on the part of any termination payment in excess of
£30,000 (which is currently only subject to income tax);
There are conflicting judicial
decisions on the tax treatment of payments for injury to feelings
(which is a remedy available in discrimination cases). The
government has decided that payments of this kind will not benefit
from any tax exemption so will be subject to deduction for income
Although the legislation is currently only in draft form, it is
likely that any changes made to the draft will not affect the
substance of the above proposals.
It is good news for both employers and employees that the
£30,000 tax exemption is to be retained as it has long been a
useful tool in negotiating the departure of employees. For
employers it assists with managing the workforce effectively and
employees benefit from a larger payment. For those termination
payments over £30,000 however, employers will now have
increased costs because they will have to pay employer NICs and
will have to budget accordingly.
All PILONs being taxed has its pros and cons. On the one hand,
there will no longer be any confusion over the tax position on
PILONs. However, given that the PILON can no longer be paid tax
free, employers will no longer be able to incentivise employees by
offering merely a tax free PILON. To encourage settlement, it is
likely that employers will have to pay an additional ex
gratia amount on top of any PILON which will result in
increased costs for employers.
Originally published September 2016
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
The personal representatives, who are responsible for administering the estate of someone who has died, generally require a Grant of Representation to allow them to collect in, sell and distribute the deceased's assets.
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).