The tax treatment of termination payments changed from 6 April 2018 and further changes will come into effect in 2019.

Pay In Lieu of Notice

Employers 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 NICs is the amount of the termination payment that represents payment in lieu of notice (PILON).

Ex-gratia Payments

The first £30,000 of genuine ex-gratia payments continue to be exempt from income tax and national insurance. The £30,000 limit includes statutory redundancy payments. Payments in excess of £30,000 are taxed as employment but there is currently no NIC on such payments. It was originally proposed that employers’ NIC would be applied to such payments from 6 April 2018 but the delayed introduction of the National Insurance Contributions Bill means that employer NICs on termination payments above £30,000 will now take effect from 6 April 2019.

As with all of our tax tips and web pages this information is necessarily summarised and of a general nature.  If you would like detailed specific advice please contact us.