Will your first £30k redundancy payment now be subject to tax?

Government Plans to Abolish £30k Tax Free Redundancy Payments by April 2018.

The UK Government has recently published draft legislation, which further clarifies the proposed changes to the tax treatment of the first £30,000 of termination payments received.  This new legislation if approved, will take effect from 6 April 2018 and will significantly impact both employers and employees.  If you are therefore considering restructuring your business, it is important that you plan ahead and take account of these changes.

What will be changing?

Per the latest draft clauses released for the Finance Bill 2017,  the Government has sought to tighten and clarify the tax treatment of termination payments.  Measures published include:

  • Making all contractual and non-contractual payments in lieu of notice (“PILON”) taxable as earnings;
  • Requiring employers to tax the equivalent of an employee’s basic pay, if notice is not worked;
  • Removing foreign service relief for employees who have spent time working outside the UK;
  • To align the tax and employers NIC treatment of termination payments, so that employers NIC will be payable on the amount of termination payment exceeding £30,000.

How will this impact you?

Current redundancy payments comprise of elements including compensation for losing your job, and PILON. Under current legislation, the first £30,000 of the PILON element has been exempted from income tax unless this is a contractual right of the employee.  Per the latest draft of the Finance Bill 2017 however, going forward the PILON would be taxable regardless of whether it is a contractual right.  This removes an important exemption that many have relied upon to obtain the first £30,000 of termination payment tax free.

Employers will also have to pay National Insurance contributions on PILON amounts over £30,000 for the first time.  This is an added expense that should be factored in when planning for restructuring your business, and in particular will add to the tax cost for employers on termination packages for senior executives.

The Government has however confirmed its commitment to retain payments made in certain circumstances as exempt.  These include (amongst others), payments made because of the death, disability or injury of the employee, in respect of certain legal costs, for liability and indemnity insurance etc.

What to do next?

It is recommended that Employers that are planning on reorganisation or restructuring their business that could involve termination by PILONS and redundancy, should start preparing now for these changes.

If you are an employer or employee affected by these future changes and would like to seek some tax advice on your position, please don’t hesitate to get in touch with a member of our team.