Impending Changes to the Taxation of Termination Payments

HMRC has finally published its draft legislation amending the taxation of termination payments. The changes are intended to come into force in April 2018, and the major changes proposed are as follows:

  • All payments in lieu of notice (PILONs) would be made taxable, even if they are non-contractual. Currently contractual PILON clauses do attract deductions for tax and national insurance. However if there is no contractual right to make a PILON in the employee’s contract of employment, the employer is technically breaching the employee’s contract by making a PILON and the money can therefore be paid free of tax as damages for breach of contract;
  • Employees will now have to pay national insurance contributions on sums over £30,000 (currently employees only have to pay tax on termination sums over £30,000 and sums under £30,000 do not attract deductions for tax or national insurance)
  • Ensuring payment for injury to feelings are also subject to tax (there is currently a conflict of judicial authorities on this point).

The precise wording of the draft legislation is open for consultation until 5 October 2016. For those wanting some light bed time reading they are available here.

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