Up to 5 April 2018, certain payments in lieu of notice were not taxable, primarily, those not contractually required to be made.
This is no longer the case.
Employers will now need to pay Income Tax and Class 1 National Insurance contributions (NICs) on an element of all termination payments from 6 April 2018, whether or not they are contractual payments.
The element that is now chargeable to Income Tax and NIC is the amount of the termination payment that represents payment in lieu of notice (PILON). This change applies to payments, or benefits received on, or after, 6 April 2018 in circumstances where the employment also ended on, or after, 6 April 2018. This follows an announcement at Budget 2016 that government would introduce rules to prevent employers from manipulating the system.
This measure is intended to bring fairness and clarity to the taxation of termination payments by making it clear that all PILONs, rather than just contractual PILONs, are taxable earnings.
All employees will pay Income Tax and Class 1 NICs on the amount of basic pay that they would have received if they had worked their notice in full, even if they are not paid a contractual PILON.
This means the tax and NIC consequences are the same for everyone and are no longer dependent on how the employment contract is drafted or whether payments are structured in some other form, such as damages.
If you would like to discuss this article in more depth please contact DSC Chartered Accountants on Harrogate, 01423 560547 or Leeds, 0113 243 3559.