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Published 12 March 2018
The biggest statutory shake-up in a generation will be happening to the taxation of termination payments with the first wave of changes taking effect on 6 April this year and more changes next year.
With effect from 6 April 2018, the following changes will take place:
HMRC are in the process of drafting detailed guidance on the application of the new rules and it is hoped it will be published before 6 April.
Proposed changes to subject all termination payments above the £30,000 exemption to employer NICs have been delayed until April 2019.
The sting in the tail for Salary Sacrifice
Whilst the removal of the PILON arguments may sound simple, if the employee sacrificed some salary, for, say, enhanced employer pension contributions, this can make the calculation complicated.
The effect of the changes is to fully tax as earnings such part of the termination payment as is deemed to be in respect of unworked notice; the balance can benefit from the £30,000 tax exemption. The amount deemed to be in respect of unworked notice is calculated using "basic pay", which includes pay that would have been received had it not been salary sacrificed, but excludes overtime pay, bonuses, commission, allowances, benefits in kind etc.
There is a divergence of opinion as to when the new rules apply with some people suggesting they won't apply if there is a contractual PILON. Our view is that this is optimistic and all the new rules will apply regardless. Therefore the amount of tax and NICs due from an employee with a contractual PILON clause and a salary sacrifice arrangement will increase.
What if the termination date is before 6 April but payment is made after 6 April 2018?
The new rules only apply where the termination and payment is on or after 6 April 2018. If the employment terminates before 6 April the current rules apply.
Employers currently contemplating or negotiating termination agreement need to be aware of the changes to the tax regime which will apply after 5 April. The impact of the change is to potentially increase costs to an employers who may have to increase the value of a termination package to make it equivalently attractive to an employee. Therefore employers should factor in the new rules when considering the negotiation and timing of termination payments.
Some employers have historically decided not to include PILON clauses in their contracts of employment so that employees can benefit from the current tax exemption. We recommend that these employers review their contracts of employment, as there will be no tax upside from April 2018 of not including a PILON in the contracts. Indeed, because any restrictive covenants are unenforceable where PILONs are made without a contractual PILON clause, there will only remain a potentially significant downside of not including a PILON in the contracts after April 2018.
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