We have noticed a lack of publicity about two important changes which are due to be introduced from April next year so we thought we would put them on your radar.
The taxation of payments in lieu of notice
There is going to be a subtle but important change to the taxation of payments in lieu of notice. As things currently stand, if a contract of employment has a ‘pay in lieu of notice’ clause (commonly referred to as a PILON) if that employee’s employment is then terminated and notice is paid in lieu (instead of the employee working out their notice), that payment in lieu has to be paid subject to the usual deductions for Income Tax and National Insurance Contributions (NICs) because it is deemed to be a payment made pursuant to a contractual obligation. If however there is no PILON clause in the employee’s contract of employment and the employer decides to make a payment in lieu, that payment can be structured tax efficiently and can be made without the usual deductions (up to £30,000); the rationale is that the payment is not being paid pursuant to a contractual obligation but rather as ‘compensation’ for not being permitted to work out a period of notice. As from April next year however, HMRC has indicated that all payments in lieu of notice will be subject to Income Tax and NIC regardless of whether or not there is a contractual PILON clause in the relevant contract of employment.
The taxation of ex-gratia compensatory payments
Where an ex-gratia/redundancy payment is made to an employee on termination of their employment, Sections 401-404 of the Income Tax (Earnings and Pensions) Act 2013 provide that the first £30,000 of a non-contractual ex-gratia compensatory payment can be paid without any deductions. Anything over £30,000 however is payable subject to Income Tax but not NIC. As from April next year however any ex-gratia compensatory payment which is over £30,000, the amount over £30,000 will be subject to not only Income Tax but also NIC deductions.
Edwin Coe LLP is a Limited Liability Partnership, registered in England & Wales (No.OC326366). The Firm is authorised and regulated by the Solicitors Regulation Authority. A list of members of the LLP is available for inspection at our registered office address: 2 Stone Buildings, Lincoln’s Inn, London, WC2A 3TH. “Partner” denotes a member of the LLP or an employee or consultant with the equivalent standing.