Settlement Agreements – Changes to Taxation of termination payments

Settlement Agreements – Changes to Taxation of termination payments
April 5, 2018 RichardReed

Settlement Agreements – Changes to Taxation of termination payments

With effect from 6th April 2018, new rules will come into force which will affect employers who make termination payments and all employees who receive termination payments.

As from 6th April 2018 all employees who receive a termination payment will pay tax and Class 1 NICs on the amount of basic pay that they would have received if they had worked their notice in full.  This will apply even if an employee leaves employment part way through their notice period.  Previously, only contractual payments in lieu of notice (“PILON”) were considered taxable income. In contracts where there had been no mention or any discretion for a PILON the payment was generally treated as “damages” for breach of contract and could qualify for the £30,000 income tax exemption.  Now, it is no longer dependant on how the contract has been drafted or how the payment has been structured e.g., as damages.

All other termination payments will be covered by the current £30,000 income tax exemption.

If you require any advice in relation to the above or, indeed, any other issues please do not hesitate to contact Lisa Branker, Solicitor in our Employment & HR Department on 0191 5670465 or by email lkb@richardreed.co.uk or employmentlaw@richardreed.co.uk.

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