Currently employers are able to use termination payments in the course of negotiating a mutually agreed exit. Often so that a formal but inevitable process can be avoided, and for the benefit of all involved. In such cases, the employee concerned may be offered a payment on termination which is paid under a settlement agreement. The agreement is used to ensure that no legal action can be taken against the employer, and in consideration of this, the employee receives a sum of money, called the termination payment. This amount includes other entitlements such as notice pay, redundancy pay and ex gratia payments.
Termination payments up to the value of £30,000 can be paid tax free. But anything over this amount will attract tax deductions. Although this has not changed, a close examination of the employment contract in each case is required.
Currently, if an employee does not have a clause in their employment contract which allows for their notice payment to be paid “in lieu”. This means that they do not have to work their notice but will be paid it in a lump sum. The amount could be added to the termination payment and paid tax free, as long as it is under the £30,000 threshold.
However If there is a PILON clause (Payment in Lieu of Notice) within the employment contract, notice has to be treated separately and taxed in the usual way. If this is not done it would attract unwelcome interest from the Inland Revenue and potentially viewed as tax avoidance.
The benefit for both employers and employees has been that as long as there is no PILON clause within the contract, and the termination payment was no higher than £30,000, the notice pay could be paid without deductions. This means the lump sum offer could be more attractive to both parties.
The position from 6th April 2018 onwards
For any termination payments due to be paid on or after 6th April 2018, any “payment in lieu of notice” will need to be taxed as earnings. The employer will need to carefully calculate the full extent of any unexpired notice the departing employee would have been entitled to and ensure that the payment for the equivalent period is subjected to tax and national insurance contributions required. This still applies whether or not there is a payment in lieu of notice clause in the contract of employment.
This means that the need to closely inspect and interpret the employment contract has disappeared. However, it also takes away the ability to offer increased termination payments at no real cost to employers, and the benefit certainty lies with the Inland Revenue rather than the parties involved.
For further information on this or any other employment issues please contact Sally Phillips on: sally.phillips@wardwilliams.co.uk or give us a call on 01932 830664










