Changes to termination payments could increase employer tax liability

HMRC loan charge

Recent changes to payments in lieu of notice (PILONs) could mean further tax is due from employers when employees leave.

Under previous rules, an employer could pay up to £30,000 on termination, free of tax where there were no contractual PILONs in place. In these cases the termination was treated as damages for breach of contract. There was also no national insurance due on this amount.  This resulted in a significant amount of tax savings for employers.

However, from 6 April 2018, all PILONs are now treated as earnings and are therefore subject to tax and national insurance.

The new legislation is based on the employee’s basic pay excluding any salary sacrifice arrangements, and is due on the Post Employment Notice Pay (PENP). This legislation requires tax to be paid on termination payments if the employee leaves early, regardless of why they leave early. The balance on the termination payment will be exempt from income tax if below £30,000.

Furthermore, Foreign Service Relief has been abolished and exemption from tax for payments for injury and disability do not apply to injury to feelings.