A nervous disposition
From 6 April 2018 important changes will be coming into force in relation to the way termination payments are taxed. All employers will need to take these changes into account when dismissing UK employees.
When an employee’s employment is terminated, that employee is generally entitled to notice. If there is a payment in lieu of notice clause (PILON) in the employment contract, the employer is entitled to terminate the employee’s employment immediately and pay them the sum specified by the contract, which is often the basic salary the employee would otherwise have accrued had they actually worked the notice period. Where there is a contractual PILON clause, the PILON will normally be paid subject to tax and National Insurance contributions (NIC). This will continue to be the case after the changes come into force in April.
In situations where an employee is dismissed and there is no PILON in the employee’s contract, employers have typically been able to pay a sum (broadly reflecting the employee’s earnings during the notice period) as damages free of tax and NIC provided that the aggregate value of all qualifying termination payments does not exceed £30,000.
In the past HMRC has clamped down on employers who did not include contractual PILON clauses in their employment contracts but had a practice of making payments in lieu of notice to their employees. However, the rules that are coming into force on 6 April 2018 go one step further by providing that, where there is no contractual PILON in the contract, employers will always have to deduct tax from any amount which equates to “post-employment notice pay”.
The “post-employment notice pay” will essentially be the basic salary the employee would have earned had they remained in employment for the notice period. How this taxable amount must be calculated under the new legislation will depend upon
In the event that all of these amounts are expressed in months, the answer is relatively straightforward. In other situations a formula will need to be applied based upon the employee’s basic pay for the last pay period, the number of days in the post-employment notice period and the number of days in the last pay period. Payments outside of basic salary (for example, overtime, bonuses etc.) will not be included in the calculation of post-employment notice pay.
The overall effect is that the deemed post-employment notice pay will now be taxable. Other termination payments may still potentially benefit from the aggregate tax-free £30,000 exemption, subject to the usual exceptions.
There are also further plans to make amounts over the £30,000 tax threshold liable to employer's NICs. Currently, such amounts over the £30,000 threshold are only subject to income tax. However, these changes have been postponed until April 2019.
There are other important changes coming into force on 6 April 2018, including the abolition of foreign service relief for most employees who have worked abroad, and narrowing of the exemption for payments made in respect of injury to feelings in discrimination claims.
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