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Did you know: changes to termination payments

Did you know that recent changes by HMRC mean employers can now no longer assume the £30,000 tax free limit applies to post termination payments?

There are two key changes you should be aware of – the first impacts exit payments and affects Payments in Lieu of Notice (PILON) and the second change is the introduction of the concept of Post-Employment Notice Pay.

Historically, PILON was only taxable when there was a right to pay in lieu included in employment contracts. The new legislation now treats all PILON payments as earnings regardless and therefore are subject to tax and national insurance contributions (NICs).

The introduction of Post-Employment Notice Pay (PENP) means we have a new formula to base tax and NICs calculations on. So it’s not as straight forward as it used to be to calculate exit packages. You now need to consider what the earnings would have been had they worked between the time the employee’s notice had been given and their employment end. This may also include PILON payments made too.

These changes together mean you must be careful in designating any termination payments as tax free without first seeking specialist advice. There are penalties for inaccurate or late payments in addition to any overdue tax and NICs, which may also be subject to interest.

Our team of employment lawyers are perfectly placed to support you with any decisions around terminating employment and negotiating packages and Settlement Agreements on your behalf. Get in touch with us and we can make sure your business is protected.