Employers: prepare now for the new Termination Payments Rules in April 2018

By Justine Riccomini, Head of Taxation (Scottish Taxes, Employment and ICAS Tax Community)

1 March 2017

Having completed the latest round of consultations on termination payments, employers and tax professionals now need to wait until the Budget on 8 March for the outcome.

The new termination payments rules will then be enshrined in law (once the Draft Finance Bill has been approved by Parliament and received Royal Assent).

The changes

The proposal is to allow tax and NICs relief on termination payments which do not exceed £30,000 as long as they do not contain an element of pay in lieu of notice, or PILON. After many years of wrangling with employers and advisers about the taxability of PILONs, HMRC has finally decided to change the law.  

Thus, from April 2018, regardless of whether or not the PILON was received under the terms and conditions of the employment contract, PILONs will not be exempt from the first £30,000 of a payment arising from the termination of the employment.  

It does not matter whether the termination payment is classified overall as a redundancy, a mutually agreed amicable dismissal, or an acrimonious parting of the ways.  Simply including PILON in a Settlement Agreement (formerly a Compromise Agreement) will not qualify it for exemption either.

Payments in lieu of bonuses will, however, be included in the £30,000 exemption, which could result in becoming a planning point for employers awarding accruals of fixed or discretionary bonuses.  Protests from employers and tax advisers during the latest round of consultation succeeded in stopping HMRC from closing this planning point off, but only time will tell if this remains the case .

Equal treatment to all termination payments

Additionally, whilst missing the opportunity for genuine simplification, HMRC decided to take the advice of the Office of Tax Simplification and applied equal treatment to all termination payments which exceed £30,000 – by applying both PAYE and employer’s (secondary) NICs to them, resulting in higher costs for employers who negotiate large termination payments, for example, for senior employees, from April 2018.

This measure has resulted in additional draft NICs legislation to ensure that payments arising on termination of an employment are treated as earnings arising from that employment to the extent they exceed £30,000, to mirror the tax legislation.

Employers beware

Employers should be mindful of the above changes, especially in cases of large scale redundancies or where it has been common practice to make a PILON payment to a worker on termination to mitigate additional NICs burdens, where possible. And, it remains the case, that specialist advice should be sought when putting together the terms of any termination.

Find out more about the latest issues affecting employers

An update on employment issues will be given at the ICAS Tax Conference 2017, which takes place at the Radisson Blu Hotel, Edinburgh on Tuesday 23 May. Cost: Members and Students: £192 Non-members: £234 CAPS Firm: £174. All prices include VAT.


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