HMRC have now confirmed that the £30,000 tax exemption which applies to termination payments for loss of employment will remain. However, there are changes proposed which are likely to add to the cost of many severance payments.
Summary of the key points:
- The first £30,000 of a termination payment for loss of employment will remain exempt from income tax (subject to the same limits as currently apply);
- Such termination payments will also continue to be exempt from employee NIC’s, and any excess over £30,000 will also still be exempt. However employer NIC contributions will be payable on payments over £30,000 (which are currently only subject to income tax);
- The current difference in tax treatment between contractual PILONS (clauses which entitle an employer to pay an employee in lieu of notice) and payments in lieu of notice paid without such a provision, is to be abolished. All employers will have to deduct income tax and pay NIC contributions on pay in lieu of notice (or a sum equivalent to it) if an employee is asked to leave immediately or part way through their notice period, irrespective of what is in the contracts; and
- Injury to feelings, awards or amounts paid referable to injury to feelings and termination are to be taxable (save where they otherwise fall within the £30,000 exemption).
Impact of change
These changes are proposed to take effect from April 2018, so the taxation of current severance payments does not change. The proposed legal changes are out for consultation until 5 October. Once implemented, these changes will mean that you may need to review and alter how you tax pay in lieu of notice; and employer NICs will increase the costs of severance payments. The continued existence of the £30,000 exemption, will however mean that most redundancy payments and many severance payments can be agreed and paid on a tax effective basis.
You may therefore feel that you need to review your contracts of employment and if this is a concern let us know as we would be pleased to refer you to local employment law specialists who would be happy to advise with regard to notice/ termination payments.
For further assistance on this topic please contact Sue Stephens.