The government has made changes to the taxation of termination payments with effect from 6 April 2018, in particular to Payments in Lieu of Notice (PILON) within Settlement Agreements.
So what has changed?
Previously, the position with regards to ‘PILON’ depended on whether or not an employer had a contractual right to make a PILON. If there was a contractual right, that payment would be subject to deductions. If there was no contractual right to make a ‘PILON’, any payment made in respect of an employee’s notice entitlement was treated as damages for breach of contract meaning that the first £30,000 could be paid free from deductions.
The government wanted all employees to be treated as though they had worked their notice regardless of the circumstances. The new rules are intended to simplify taxation of termination payments and create equality.
From 6 April 2018, a PILON will always be subject to deductions for tax whether there is a relevant clause in the employee’s contract or not.
In addition to the changes in respect of PILON, the following have also been introduced:-
Post-Employment Notice Income
If an employee does not work their notice, they will still need to pay tax and national insurance contributions on any payment which corresponds to the earnings they would have received if they had worked their notice. These earnings will be calculated on the basis of their actual earnings in the previous 12 weeks. This will include any bonus which the employee would have received during their notice.
Payments for Injury to Feelings
The new legislation also makes clear that payments for Injury to Feelings are subject to tax for any amount which exceeds £30,000, unless there is a psychiatric injury or other recognised medical condition,
National Insurance Contributions
The changes introduced National Insurance Contributions on sums over £30,000.
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