Changes to termination payments could increase employer tax liability

Recent changes to payments in lieu of notice (PILONs) could mean further tax is due from employers when employees leave.

10 Apr 2018

Recent changes to payments in lieu of notice (PILONs) could mean further tax is due from employers when employees leave.

Under previous rules, an employer could pay up to £30,000 on termination, free of tax where there were no contractual PILONs in place. In these cases the termination was treated as damages for breach of contract. There was also no national insurance due on this amount. This resulted in a significant amount of tax savings for employers.

However, from 6 April 2018, all PILONs are now treated as earnings and are therefore subject to tax and national insurance.

The new legislation is based on the employee’s basic pay excluding any salary sacrifice arrangements, and is due on the Post Employment Notice Pay (PENP). This legislation requires tax to be paid on termination payments if the employee leaves early, regardless of why they leave early. The balance on the termination payment will be exempt from income tax if below £30,000.

Furthermore, Foreign Service Relief has been abolished and exemption from tax for payments for injury and disability do not apply to injury to feelings.

Aside image

Accountancy services tailored to you.

Find out more »

Aside image

Are you tired of bookkeeping?

Find out more »

Aside image

Is your business just starting up?

Find out more »

Aside image

Are you paying the right amount of VAT?

Find out more »

Aside image

Struggling with your self assessment tax return?

Find out more »

Aside image

Looking for more than just compliance services?

Find out more »

Why not register to receive our Monthly Newswire?

Once a month we'll send you an email packed full of essential business news and handy tax tips to help save you money.

Sign up now