Imminent change to tax on termination payments
Changes to the tax treatments on payments in lieu of notice (PILON) come into force imminently. From the 6th April 2018 the basic pay that an employee would have earned had the employee worked their notice in full will be taxed on the same basis as earnings.
Employers will be required to specify the total amount of payments or benefits made to an employee in connection with the termination of their employment. The portion that represents the basic pay that the employee would have received had their employment been terminated with full or proper notice will be subject to tax and Class 1 National Insurance Contributions.
At present, where an employment contract makes no reference to the ability of the employer to pay in lieu of notice, it is possible to be able to make such a payment without deducting tax. This is because not being a contractual right, it would amount to a payment for a breach. However, under the new tax rules, this will no longer be possible.
HMRC has confirmed that the changes refer to both the date of payment and the date of termination. This means that the changes will only have effect where the payment is made, and where the employment is also ended, on or after 6 April 2018.
If you are intending to make such a payment you should seek tax and legal advice before doing so.
Posted on 27 Mar 2018