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Income Tax and National Insurance contributions: treatment of termination payments – Changes from 6 April 2018

The Government are changing the way that termination payments are taxed from April 2018. Employers who make termination payments to employees and employees who receive termination payments will both be affected by the change in rules.

To date and up to the 5 April 2018, settlement agreements may have included ‘gross’ payments for a number of months with a tax indemnity. From 6 April 2018 these will no longer be possible.

From the 6 April 2018 any pay in lieu of notice (PILON) will be taxable and paid in the normal way. This is regardless of whether or not there is a PILON clause in the employee’s contract of employment.

The measure clarifies the scope of the exemption for termination payments through a number of changes. All payments in lieu of notice (PILONs) will be both taxable and subject to Class 1 NICs. The legislation requires the employer to identify the amount of basic pay that the employee would have received if they had worked their notice period, even if the employee leaves the employment part way through their notice period.

The amount will be treated as earnings and will not be subject to the £30,000 Income Tax exemption. All other termination payments will be included within the scope of the £30,000 termination payments exemption which currently exists. The measure also makes changes to certain exemptions in the termination payments legislation. It removes foreign service relief and clarifies that the exemption for injury does not apply in cases of injured feelings. For more information please read the Government's Policy Paper.

If you need advice relating to Protected Conversations and Settlement Agreements please speak to your HR Consultant, contact one of our team on 01924 827869 or email enquiries@fusionbusiness.org.uk.

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