Tax Treatment of Termination Payments

The Government has prepared draft legislation to reform tax treatment of termination payments from April 2018.

The changes to the national insurance and tax treatment of termination payments will have significant consequences for employers in terms of costs and exit strategies.

Tax Treatment of Termination Payments

Under the draft legislation it is proposed that:

• all payments in lieu of notice (PILONs) will be subject to tax and NICs as earnings. Even where there is no PILON clause in the employment contract;
• the £30,000 income tax and NICs exemption will remain for certain forms of termination payments;
• employers will be required to pay employer NICs, as well as income tax, on termination payments that exceed £30,000. The employee NICs exemption will remain unchanged;
• payments for ‘injury to feelings’ will be subject to deductions for tax; and
• the foreign service relief exemption (which reduces tax on termination payments where an individual has worked overseas) will be abolished.

The key changes will be achieved by amending the termination payment legislation in the Income Tax (Earnings and Pensions) Act 2003. The Government has invited views on the draft legislation by 5 October 2016.

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