As you may be aware, the government has embarked on a series of reforms with a view to simplifying, clarifying and tightening the tax treatment of termination payments to employees.
From Friday 6 April 2018 inclusive all payments in lieu of notice (PILONs) will be treated as earnings.
This means that all PILONs will be subject to tax and Class 1 National Insurance Contributions (NICs). This applies regardless of whether:
As such, it will no longer be possible to offer a tax-free lump sum in lieu of notice as part of settlement negotiations. Therefore, if and to the extent an employee does not work some or all of their notice period, employers will be required to tax and make NI deductions from an amount equivalent to ‘notice pay’ when making termination payments.
Calculating ‘Notice Pay’
There are two different formulas for calculating the tax on the portion of the termination payment equivalent to ‘notice pay’, depending on whether the employee is paid monthly and whether the notice period under the contract is expressed in months. Where an employee is paid monthly, and their notice period or unworked period of notice is expressed in months, the calculation is straightforward. A more complicated formula is applied if the employee is not paid monthly or the employee’s notice period or unworked period of notice is not expressed in months, in which case a calculation of the number of days for which notice pay is owed must be carried out. Both calculations are based on pay in lieu of basic pay only. Employers should therefore have regard to the formulas set out in the legislation when calculating the sum to be taxed as notice pay.
The following further changes will also take place as of 6 April 2018:
If you require any advice on the changes highlighted above please do not hesitate to contact a member of our Employment Team who will be more than happy to help.
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