The government proposes to reform the tax treatment of termination payments. A consultation period is currently being undertaken. The government have produced draft legislation. It is envisaged that the legislation will be implemented with effect from April 2018.
The current position is that all non-contractual payments in lieu of notices can be paid without deductions of tax and National Insurance. Whereas, contractual payments in respect of payments in lieu of notices have to be tax with both tax and National Insurance have to be deducted.
The draft legislation, whilst maintaining in principle the distinction between contractual payments (tax and National Insurance deducted) and non-contractual payments (tax-free), will provide that any payment that the employee would have received if they had worked their contractual notice period will be subject to both tax and National Insurance deductions regardless of when the employee actually leaves or whether the employment contract restricts entitlement in a termination situation. That is all PILON payments, contractual or non-contractual, will be subject to employer NIC and PAYE.
Therefore, the draft legislation ensures that tax and National Insurance contributions are deducted from all notice period payments whether there is a contractual entitlement to a payment in lieu of notice or not.
The consultation period expires on 5th October 2016, and it will be interesting to see to what extent the consultation has affected the draft legislation that has been produced by the government. On the basis of the draft legislation as it exists, it will have achieved what the government set out in its objective (namely the simplification of these payments). I am sure, as a matter of pure coincidence, land the treasury with greater tax receipts on these payments.
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