On 6th April 2018 the rules on taxation of termination payments in employment changed.
HMRC have published guidance on the new rules that require income tax and national insurance contributions (“NICs”) to be paid on all payments in lieu of notice (“PILONS”), whether contractual or not.
Previously, payments were exempt from NICs and any amount up to £30,000 could be paid tax free.
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 employment part way through their notice period.
Although the principle is intended to be straightforward there is a complex statutory formula for calculating the taxable sum, known as ‘post-employment notice pay’ (“PENP”). PENP is the salary the employee would have received during any unworked period of notice minus any contractual PILON.
This measure is intended to bring fairness and clarity to the taxation of termination payments by making it clear that all PILONs, rather than just contractual PILONs, are taxable earnings.
If you'd like further information, please contact Gareth Dando on 01484 558 060 or email gareth.dando@ramsdens.co.uk.