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The rules on Taxation of Termination Payments have changed

10th April, 2018

New rules on the taxation of termination payments came into effect on Friday 6 April 2018. These rules are part of the Finance Bill 2018 and their purpose is to tighten and simplify the tax treatment of termination payments.

As of 6 April 2018, the following will be subject to tax and NICs:

  • Post Employment Notice Period (“PENP”): Even if an employee doesn’t work their notice period (for whatever reason) and irrespective of whether there is a payment in lieu (PILON) clause in their contract of employment, an employer will still need to pay tax and NICs on any payment which relates to earnings the employee would have received had he/she worked their notice.
  • Employers will need to follow the PENP formula to ensure that the tax is correctly calculated. This includes any payment or benefits that the employee would have received during their notice period or before their employment ended. For example, an expected bonus or car allowance during their notice period.

The first £30,000 of non-contractual termination payments are still tax free, with any balance over £30,000 subject to tax. However, the government now has the power to increase or decrease this £30,000 figure.

Employers will now need to break down the different elements of a settlement package and consider whether each part is taxable. As a result, the changes may add to the cost of a settlement agreement and reduce the amount being offered by employers.

If you wish to find out more about taxation of termination payments or any other employment law matters, please contact Adam Haines in our specialist Employment Law Team.

Adam Haines

Associate in Employment Law
Email: [email protected]
Tel: 01244 405414

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