Watch out for tax changes to termination payments

News Article

Businesses need to be aware of changes to the taxation of termination payments which came into effect on 6 April.

The new rules affect payments in lieu of notice (PILONs) which are now subject to Income Tax and National Insurance Contributions (NICs) and are designed to ‘simplify’ the system.

Prior to the new tax regulations, many PILONs benefitted from tax exemptions affecting any termination payments that were not deemed taxable as ‘earnings’. This meant that employers could make termination payments up to the value of £30,000 tax-free – and such payments were not subject to NICs.

Samantha Randall, a Solicitor in our Employment department explained: “Under the old rules, the tax treatment of a PILON was always dependent on whether or not an employer had the ‘contractual right’ to end an employment relationship with a worker by offering a termination payment as opposed to issuing a notice period.

“Under the new rules, all PILONs – regardless of whether or not they are ‘contractual’ – incur tax.

“It is important that employers and employees alike seek specialist advice around termination payments relating to both contractual and tax considerations.”

The new rules affect any payments made on or after 6 April 2018 with regards to any terminations that have taken place either on or after that date. For more information and advice on PILONS or any aspect of employment law, please contact us.