The termination payments they are a changing

From 6 April 2018 all payments paid to an employee in lieu of notice as earnings will be subject to income tax and Class 1 national insurance contributions. Are there any steps you should take before April?

Employment Lawyers usually don’t need to worry too much about tax.   Issues regarding income tax etc can be dealt with by payroll or by accountants. In the employment sphere the only time that employment lawyers normally get involved in issues of tax is when an employee is about to leave the company.

For many years it has been a very well established pattern that when an employer decides to terminate the employment of the employee that they can make a payment to the employee for their loss of employment.  It is widely known that it is possible to make a payment up to £30,000 as compensation for loss of employment.  Such payments will not be subject to either income tax or national insurance contributions.  This limit applies even if the exit from the company is by way of mutual consent, as well as for payments in relation to settling tribunal claims or in redundancy cases.  When an employer comes to me and says they are thinking about letting an employee go and on what terms could they do it, the first step is to look at the contract of employment.

Many contracts of employment will contain something called a PILON clause, which stands for payment in lieu of notice.

If the contract contains a PILON clause then a lump sum payment in respect of notice pay must be taxed.  However, some contracts of employment do not contain a PILON clause.   This means if the same employer pays a lump sum in respect of   notice then the employer is, technically, in breach of contract because there is no PILON clause in the contract.

That means the PILON payment can be paid free of tax and national insurance up to £30,000, which is a considerable benefit both to the employee who can receive the payment without any statutory deduction at all.  It is also an inducement to the employer because they do not pay employer’s national insurance contributions.  For this reason many wily contract drafters will not include a PILON clause in the contract of employment so that this can be taken advantage of at the appropriate time.  There are other considerations for putting in a PILON clause but they beyond the scope of this particular article.

However, this is all about to change from next April.

From 6 April 2018 all payments paid to an employee in lieu of notice as earnings will be subject to income tax and Class 1 national insurance contributions.  This means that employers will be required to subject to tax an amount equivalent to the employee’s basic pay if notice is not worked.  The £30,000 exemption will remain available for other termination payments.

The big point to note now for employers who are thinking of dispensing with certain employees  is to take the steps before next April.  If you are either in discussions or considering whether to ask a certain member of staff to leave, it is better to act quickly and get the deal done before 6 April 2018 or run the risk of falling foul of the new rules.  An employer should not underestimate the attractiveness of being able to say to an employee that they will be able to pay them their notice pay gross as opposed to tax, particularly in the case of well paid employees for whom it could mean an additional 40%.

As ever, if you need advice on any of this please get in contact.