PAYROLL INSIGHT
John Harling, principal employment taxes consultant at PSTAX, discusses impending important changes Termination payments
C hanges to the tax and National Insurance contributions (NICs) treatment of payments on redundancy and termination are due to come into effect from next year. Additionally, there are still plans to introduce a cap on exit payments in the public sector and a requirement for public sector employees to repay exit payments in certain circumstances. However, the details and timing of these particular plans are yet to be finalised. Tax/NICs changes Under the Finance Bill 2017 which is currently going through Parliament, the changes set out below will apply to payments on redundancy/termination made on or after 6 April 2018. For many years, employers have struggled with the tax/NICs treatment of payments in lieu of notice (PILONs), which varies according to the character of the PILON itself. Therefore, from 6 April 2018, it will make no difference whether the payment is contractual or non- contractual and whether it is automatic/ customary or purely discretionary. This will mean that the ‘basic pay’ that the employee would have received had they worked out their notice is subject to tax in full regardless of whether there is a clause in the employment contract giving the employer the right to terminate the employee’s employment by making a PILON. ‘Basic pay’ for these purposes is the employee’s pay before any salary sacrifice adjustment in the pay period immediately prior to the date on which notice is given or, if no notice is given,
the date the employment terminates. It is intended that the definition of basic pay would exclude bonuses, commission payments, allowances and benefits in kind. It had been intended that this would also apply to the NICs treatment of PILONs from April; however, at the time of writing this article, we await confirmation of this in light of the recent announcement in delaying the National Insurance Contributions Bill to 2018 (see below).
The exemption for payments relating to disability will remain in place, but will not apply to compensation for injured feelings, unless the injured feelings constitute a psychiatric injury or other recognised medical condition. The disability exemption provides a 100% tax exemption for termination payments – there is no £30,000 threshold – made only on account of the employee’s disability or injury where the disability or injury prevents the employee from carrying out the duties of their employment. The availability of this exemption is reliant on medical and other evidence to prove that the payment relates solely to the disability/injury. It had also been intended that from April 2018 there would be a closer alignment of the tax and NICs rules in respect of termination payments and the £30,000 threshold, which would mean that a termination payment which benefits from the £30,000 tax exemption would be subject to income tax and employer Class 1A NICs (rather than Class 1) on any amounts over £30,000. However, the government announced on 2 November 2017 that a National Insurance Contributions Bill will now be introduced in 2018 with the intention that this change will now take effect from April 2019. We understand that the existing employee’s NIC exemption will still be retained, even if the payment exceeds £30,000. As mentioned above, we await confirmation regarding whether the change in the tax treatment of PILONs will be aligned with a change to the NICs treatment or whether the NICs change will be delayed to 2019.
...no difference whether the payment is contractual or
Given that the new tax and, subject to confirmation, NICs treatment of PILONs will be much less beneficial than in respect of other forms of termination payment, it remains to be seen whether public bodies will seek to structure packages in a tax effective manner with a view to saving employer NICs costs and/or reducing the overall termination package costs. non-contractual and whether it is automatic/ customary or purely discretionary
| Professional in Payroll, Pensions and Reward | December 2017/January 2018 | Issue 36 20
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