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Changes to the Taxation of Employment Termination Payments

From 6 April 2018, the question of whether or not a payment in lieu of notice (PILON) is contractual is no longer relevant for the availability of a £30,000 tax exemption. Any termination payments, including PILONs, will be subject to tax. Income Tax and National Insurance contributions will apply up to the amount of basic pay that the employee would have received had he worked his notice in full.

Previously, contractual PILONs were taxed as earnings but a non-contractual termination payment could be made tax free up to £30,000 and described as ‘damages’. The new measure is intended to bring fairness and clarity to the taxation of termination payments by making the tax and NIC consequences the same for everyone instead of relying on how the employment contract is drafted.  

The £30,000 tax exemption can still apply to termination payments but only to the excess that is paid on top of the employee’s basic pay for the notice period.

The change applies to payments received on or after 6 April 2018 in circumstances where the employment also ended on or after 6 April 2018.

 

This briefing was posted on 17 April 2018