Big Changes to Employment Termination Payments You Need to Know

blog-publish-date

21 Mar 2018

blog-read-duration

From April 6th some important changes to employment termination payments will come into force, which will affect employers who use payment in lieu notices.

What is A Payment in Lieu Notice (PILON)?

At present and provided the contract of employment allows for it, payment in lieu of notice (PILON) can be made by the employer upon termination of employment by either party. There would be no subsequent risk of a breach of contract claim because there is an express contractual right for the employer to make a PILON payment. PILONs are commonly used for staff working in sales, where an employee enters into a settlement agreement or where an employee is made redundant. They are used to allow employers to honour their obligation to pay for the requisite period of notice without the need for the employee being present for all or part of the notice period.

What’s Changing?

Occasionally, where a PILON is made but the employer does not have an express contractual right to make such a payment, that payment can receive up to £30,000 income tax exemption. This tax exemption has attracted discontent from HMRC and there have even been examples where employers have taken a deliberate decision to exclude a contractual PILON clause in an effort to take advantage of this favourable treatment towards taxation. Consequently, with effect from 6 April 2018, the Finance (No. 2) Act 2017 provides that all PILONs representing “basic pay” will be subject to tax and National Insurance Contributions (NICs) regardless of whether or not there is a relevant PILON clause in the contract of employment.

Why Has the PILON Legislation Changed?

The new legislation serves to clarify and tighten rules on the taxation of termination payments. Employees will now be required to pay income tax and Class 1 NICs on the contractual payments that they would have received had they been required to work their notice in full even where there was no existing contractual provision allowing their employer to make a payment in lieu. The distinction for tax purposes between contractual and non-contractual payments is therefore being removed. The first £30,000 of a termination payment will however remain exempt from income tax. Although employers’ NICs are due to be imposed on termination payments which are in excess of the £30,000 tax-free amount, this will only apply to termination payments made on or after 6 April 2019. These measures are being introduced to minimise the incentive for employers to manipulate the rules by structuring arrangements to include payments that are ordinarily taxable in order to minimise the income tax and NICs due. It serves to standardise the taxation of termination payments by clarifying that all PILONs are subject to tax and NICs.

What Do the Changes Mean For Businesses?

As a consequence of these changes, there is likely to be a marked increase in the number of employers who include PILON clauses in their contracts henceforward. In addition many employers may need to consider factoring in additional payments to reflect the added Tax and NIC payments that employees will incur particularly where they are seeking settlement agreements. One advantage of having contractual PILONs is that they will remove the previous unintended consequence of non-contractual PILON payments whereby the employer was subsequently unable to rely on any restrictive covenants because, by making a payment in lieu, they were technically considered to have breached the employee’s contract of employment thus rendering the other elements of the contract unenforceable.

Expert Support

Croner provides expert Tax, PAYE, VAT and payroll advice as part of our support package to businesses. Contact 0808 145 3490 for more information.

Free to Download Employer Resources

  • How to make reasonable adjustments for mental health in the workplace

    FREE DOWNLOAD

    How to make reasonable adjustments fo...

    Read more
  • Sample Health & Safety Communication and Consultation Policy

    FREE DOWNLOAD

    Sample Health & Safety Communication ...

    Download Croner's sample health & safety communication and consultation policy, here.

    Read more
  • Adverse Weather Policy

    FREE DOWNLOAD

    Adverse Weather Policy

    Here we’ve included a free sample adverse weather policy that UK business owners can refer to...

    Read more
  • World Religion Day: Your Employees' Rights at Work

    BLOG

    World Religion Day: Your Employees' R...

    Each year, thousands of businesses call Croner for advice on sensitive issues in...

    Read more
  • Conducting an Equal Pay Audit

    BLOG

    Conducting an Equal Pay Audit

    The equal pay act sets provisions for organisations to follow the same pay syste...

    Read more
  • Health & Safety Changes to Look Out For in 2019

    BLOG

    Health & Safety Changes to Look Out F...

    The news at the start of this year has been dominated by Brexit and its potentia...

    Read more
  • Solicitors Benevolent Association

    CASE STUDY

    Solicitors Benevolent Association

    “The reason for using Croner was the high-profile track record and the credibili

    Read more
  • John Taylor Hospice

    CASE STUDY

    John Taylor Hospice

    “A large number of the queries are around employment law and rights in areas suc

    Read more
  • Motorsport Industry Association

    CASE STUDY

    Motorsport Industry Association

    “I’m so happy with the service Croner provide, I’d be hard pressed to find a fau

    Read more

Ready to focus on what you do best?

Get your free consultation and speak to an expert today.