Payments made on termination of employment and other non-contractual payments such as payments in lieu of notice (PILONs) may be taxed under special provisions (ch 3, Pt 6 ITEPA 2003). Under these provisions, the first £30,000 of the termination payment can be made tax free with none of the payment liable to national insurance contributions (NIC). This can be a complex and contentious area which often leads to an HMRC enquiry challenging the tax and NIC treatment based on the contractual arrangements and the basis of the employee’s departure from employment.
Following the consultation process which took place earlier this year, changes to the treatment of termination payments will be made from April 2018 aimed at simplifying the process and preventing manipulation. The distinction between contractual and non-contractual payments will be retained, however only payments relating directly to the termination of the employment will have an exemption from income tax and employer NIC up to £30,000. The exemption from employees NIC will continue.
All PILONs and other post –employment payments which would have been treated as general earnings if the employee had worked their notice period will be subject to tax and NIC (employer’s and employees).
Individuals who unfortunately lose their jobs will welcome the decision to retain the £30,000 exemption from tax and the continued NIC exemption for payments relating solely to termination. Restricting the exemptions to payments linked to termination and aligning tax and NIC rules is aimed at making the process simpler to understand. IT is however likely to remain an area of contention where specialist advice may be needed.