The rules for the taxation of termination payments have changed and from 6th April 2018, all notice payments are subject to deductions for tax and National Insurance Contributions.
Previously, if a Payment In Lieu of Notice (“PILON”) clause was in the employment contracts it was classed by HMRC as earnings and subject to tax/NIC. If it was not in the contract then often it could be paid gross (with the caveat that HMRC could still determine that a PILON was implied into the contract through for example past practice.
However, the £30,000 will be available on the next portion of any termination payment.
HMRC state - 'General description of the measure -The measure aligns the rules for tax and secondary National Insurance contributions (employer (NICs)) by making an employer liable to pay NICs on termination payments they make to their employees. An employer will be required to pay NICs on any part of a termination payment that exceeds the £30,000 threshold. It is anticipated that this will be collected in ‘real-time’, as part of the employer’s standard weekly or monthly payroll returns and remittances to HM Revenue and Customs (HMRC).
In addition, the measure clarifies the scope of the exemption for termination payments through a number of changes. All payments in lieu of notice (PILONs) will be both taxable and subject to Class 1 NICs. The legislation requires the employer to identify the amount of basic pay that the employee would have received if they had worked their notice period, even if the employee leaves the employment part way through their notice period. The amount will be treated as earnings and will not be subject to the £30,000 Income Tax exemption. All other termination payments will be included within the scope of the £30,000 termination payments exemption. The measure also makes changes to certain exemptions in the termination payments legislation. It removes foreign service relief and clarifies that the exemption for injury does not apply in cases of injured feelings'.
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