![McDermott Will & Emery](/img/client_headers/McDermott/UniversalHeader.jpg)
In Depth
Proposal
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Change
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Effect
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1. Termination payments above £30,000 to be subject to employer National Insurance contributions (NICs). |
Currently, termination payments above £30,000 only attract income tax, not NICs.
While employer NICs will be payable under the proposal, employee NICs won’t.
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At 13.8%, the addition of employer NICs could add a not inconsiderable cost to paying a termination payment exceeding £30,000.
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2. All payments in lieu of notice (PILONs) (contractual and non-contractual) to be taxed as income. |
Currently, contractual and non-contractual PILONs are taxed differently.
Contractual PILONs (that are provided for in the employment contract) are treated as earnings and subject to income tax and both employer and employee NICs. Non-contractual PILONs, which are paid in the absence of the contractual right to do so, are subject to income tax, but not NICs.
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It isn’t always straightforward to determine whether a PILON is contractual or not given that HMRC can also have regard to the regularity with which the employer pays PILONs.
This clarification is actually welcome given the differences in opinion which can arise when negotiating a settlement agreement.
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3. Injury to feelings awards (such as for harassment or discrimination) will not qualify for general injury tax exemptions. |
There is an exemption to income tax on termination payments, in addition to the £30,000 threshold, when a payment is made because of death, disability or injury of the employee.
It is currently unclear whether injury to feelings awards qualify for the exemption as there have been contradictory decisions on the point.
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This proposal would provide additional welcome clarity, but in common with all 3 proposals, means increased cost to employers.
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These changes are likely to come into force in April 2018. Given that items 2 and 3 in the table clarify points that are currently argued either way, a prudent employer might want to veer on the side of caution when considering those issues before April 2018.
Lauren Goda (Trainee) contributed to this article.