UK: Changes to taxation of termination payments
From 6 April 2018, the distinction between contractual and non-contractual payments will be removed so that all payments made in lieu of notice on termination of employment, regardless of whether there is a contractual entitlement, will be subject to income tax and NICs. This means, broadly that:
- Contractual pay in lieu of notice (PILON) will continue to be treated as earnings and taxed accordingly
- Where an employee has not worked their notice (or part of it), before termination, the employer must calculate the “post-employment notice pay” (PENP) by applying a statutory formula which broadly works out the basic pay which the employee would have earned over the unworked portion of the notice period
- PENP is taxable as earnings and is subject to employer and employee NICs
- The new rules apply only where employment terminates on or after 6th April 2018
- Foreign service relief is abolished for UK resident employees (although new exemptions will apply for UK resident employees with foreign seafaring service).
From April 2019, Class 1A NICs (employer liability only) will be imposed for the first time on termination payments which exceed £30,000.