The Government has introduced new measures coming into effect from 6 April 2018 which clarify the position in respect of employer’s liability to pay tax and national insurance contributions on payments made on the termination of employment.
The new provisions apply to termination payments where the employee’s termination date falls on or after 6 April 2018.
The new legislation assesses and divides payments into two categories:
- Earnings; and,
- All other payments.
Payments to be treated as earnings are generally any payment provided for in the employment contract; such as salary, contractual bonuses and accrued holiday. These payments will be fully taxable and subject to national insurance contributions. Such payments will not benefit from the £30,000 tax exemption.
All other payments
All other payments will be subject to the £30,000 tax exemption; this means that an employer is required to deduct income tax on any part of a termination payment paid to an employee which exceeds £30,000. Furthermore, the proposed changes will mean that employers will also be required to pay employer’s national insurance contributions on any amount exceeding £30,000. This requirement is due to come into force in April 2019. The contributions will be collected as part of the employer’s standard payroll returns.
The new provisions make clear that all payments in lieu of notice (PILONs), regardless of whether they are contractual or not, will be subject to income tax and national insurance contributions. PILONs will not benefit from the £30,000 exemption as they are treated as earnings.
Employers are, therefore, required to pay income tax and national insurance contributions on the amount of the employee’s basic pay if and to the extent that the notice period is not worked.
The new legislation means that employers will no longer be able to avoid paying tax and national insurance contributions by altering the structure of termination payments and labelling them as “damages” when they are not.
If you should have any queries about these provisions, its implications, or wish to discuss further please get in contact with our Employment Team at either our London (0203 440 3705) or High Wycombe offices (01494 451355).