Termination Payments – New Rules


Following consultation, the government has published draft new rules on employee termination payments. As an employer, how and when might they affect you?

More tax please! The government has made no secret about needing to tighten its purse strings, but it’s more cagey about the other side of the coin: raising extra tax. It prefers to dress that up as simplifications or removing unfairness from the system. Such is its reasoning for the new rules for tax on lump sum payments to employees.

Current rules. To be fair, the current rules can be confusing, which is why many disputes with HMRC end up in court. So clarification is a good thing for employers. For example, one of the trickiest issues for employers is whether or not to tax a payment to a departing employee where it’s made for the period of notice they aren’t required to work: a payment in lieu of notice (PILON). What’s more, the treatment for NI purposes may differ.

New rules. While HMRC released details of the new legislation in August 2016, it isn’t scheduled to take effect until 6 April 2018, so you must continue to apply the existing rules until then.

What’s changing? When the new rules come in, the main changes you need to be aware of are that:-

– all PILONs will be subject to tax and NI (employers’ and employees’), in the same way as regular salary

– all other post-employment payments you make to an employee, which would have been treated as earnings if the employee had worked their notice period, will be liable to tax and Class 1 NI (employees’ and employers’); and

– payments relating directly to the termination of the employment will be tax and NI free up to £30,000 (as they are now), but any amount paid in excess will be liable to tax and employers’ NI, but you won’t have to deduct employees’ NI.

The new rules apply from 6 April 2018. Payments in lieu of notice and other earnings-related sums will be liable to tax and NI. The £30,000 exemption for sums directly linked to termination of employment will continue.

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