Proposed Changes to the Taxation of Termination Payments

Following a consultation on the taxation of termination payments launched in summer 2015, the U.K. government has proposed a number of measures intended to take effect in April 2018, including:

• Making all payments in lieu of notice (PILONs) subject to tax and national insurance contributions (NICs), irrespective of whether they are contractual or non-contractual, or whether the employee leaves employment immediately or part way through their notice period.
• Making termination payments in excess of £30,000 subject to employer NICs (they are currently subject to income tax only). However, the first £30,000 of a termination payment remains completely exempt from income tax and the entirety of the payment remains exempt from employee NICs.
• Excluding payments for “injury to feelings” from the general exemption for injury payments, except where they relate to a psychiatric injury or a recognised medical condition.

While these proposed changes are likely to make termination of employment more costly for employers, it is hoped that they will simplify the current regime, which the government found was often not understood by employers and employees alike.