Changes for termination payments coming in April

Here are some notable changes when it comes to termination payments:

Foreign service relief termination payments

The Government has decided that taxpayers who have worked abroad but are resident in the UK in the tax year in which their employment is terminated should be subject to exactly the same rules as taxpayers who have not been abroad. Clients will benefit from the existing £30,000 exemption only. The only exception to this change is if you are a seafarer.

In the past, employees who received termination payments and who had spent all or a large part of their employment overseas have been eligible to qualify for what is known as ‘foreign service relief’. This could potentially give them income tax relief of an amount greater than the standard £30,000 deduction. In some cases, the payment would be completely exempt from income tax.

The measure will apply to those who have their employment contract terminated on or after 6 April 2018. If the payment is received from 14 September 2017 onwards in advance of the termination of the employment, the restriction will also apply.

More restrictive PILON classification

The income associated with a contractual notice period that is not worked will no longer benefit from the £30,000 termination payment exemption. To further confuse matters HMRC are now referring to PILONs (Pay in Lieu of Notice) as ‘PENPs’(Post-employment Notice Pay) which represents the amount of pay, and/or benefits, that the employee will not receive because their employment was terminated without full, or proper notice being given.

Position prior to April 2018 was that if your contractual terms contain a PILON clause then these are subject to normal Tax and NI deductions, due to this being classified as earnings. However, if your contractual terms do not contain a PILON clause then the notice period is usually exempt from Tax and NIC deductions and the payment can be made gross (together with any redundancy payment or other non-contractual termination payment) subject to the £30,000 tax-free threshold for non-contractual payments.

From April 2018, all notice pay will be subject to Tax and NIC, whether or not the employee is required to work it. In addition any other contractual payments, such as bonuses, commission, performance payments or any other moneys that would have accumulated during that notice period, will also no longer qualify for the £30,000 ‘non –contractual’ income tax exemption. Also, any payments made to compensate the employee for the loss of a benefit, for example a cash payment to cover the early return of a company car, or the loss of private health insurance, will also be liable to PAYE tax and Class 1 NIC deductions.

Any payments that are not contractual, or related to the notice period, will continue to benefit from the £30,000 exemption to tax and can be paid free of Class 1 NIC (employers and employees) altogether. However, see below for more information in respect of further changes coming into effect from 6 April 2019.

Futher National insurance charge on termination payments next year

Starting in April 2019, termination payments in excess of £30,000 will now be subject to Employer National Insurance but will continue to be exempt from Employee National Insurance. Before this date all non-contractual payments are exempt from all NIC deductions.