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Taxation of termination payments: some changes delayed
It was previously announced that the Government intended to start charging employer National Insurance Contributions on termination payments above £30,000 from April this year. However, it has now been confirmed that this change will not take effect until April 2019.
The existing exemption allowing the first £30,000 of compensatory termination payments to be paid income tax and national insurance free will remain after this date.
It is worth noting that it is only employer, not employee, national insurance contributions which will be payable from next year.
While, this delay is clearly good news for employers who might be making large termination payments this year, from April 2019 these will potentially be more expensive for employers, or, if the cost is passed on, less lucrative for individuals. This will depend upon the negotiated position in each case.
However, there are more pressing changes…
From this April, all payments in lieu of notice (“PILON”) made on the termination of employment will be both taxable and subject to national insurance regardless of whether there is an express PILON clause in the contract of employment.
All employees will pay these charges on the basic pay they would have received if they had worked their notice in full – even if they don’t in fact do so. Employers will be required to work out the amount of basic pay the employee would have received if they has worked their notice period and treat this as earnings in the normal way; the £30,000 tax-free exemption will not apply.
Whether or not an employee pays income tax and national insurance contributions (“NICs”) on (part or all of) any termination payment can currently depends on whether their contract contains an express PILON. If so, then any PILON is treated as a payment made under the contract and subject to income tax and NICs. If there is no PILON in the employment contract but a non-contractual PILON is paid, this may not be subject to tax or national insurance.
The government has published further information on these changes. If you are an employer or employee needing guidance on what these changes mean for you then speak to one of our employment law experts today.
