As you may be
aware, the current position is that the first £30,000 of any non-contractual
termination payment is free of tax and national insurance contributions (NICs).
This means that where there is a pay in lieu of notice (PILON) clause
in an employee’s contract of employment, their notice pay must be paid less tax
and NICs. If the contract of employment doesn’t contain a PILON clause, an
employer may be able to make the payment free of tax and NICs as compensation
for breach of contract.
The
government is now consulting on ways in which they can simplify the tax
treatment of termination payments, details of the consultation can be found here.
The government is considering the following:
·
Removing
the distinction between contractual and non-contractual payments (this would
mean, as referred to above, that all PILON payments become tax-free);
·
Changing
the fixed £30,000 tax-free sum to an amount which increases the longer an
employee has worked (the intention is that this would proportionately reward
long-serving, lower paid employees – this could result in a much lower tax-free
threshold for many employees);
·
Only providing
tax and NICs relief where the termination payment has been made in connection 
with a redundancy (this includes voluntary redundancy);
·
Introducing
a two-year qualifying period (so an employee could not receive a tax-free
payment until they have been employed for two years); and
·
Making
injury to feelings awards, such as in discrimination cases, subject to tax for
some or all of the award (the case law on the tax treatment of these awards is
inconsistent but the current position is that they may be paid tax-free).
The
consultation will run for 12 weeks from 24 July 2015. Whilst we do not
know if or when the above changes will come into force, should they do so it
could potentially affect payments already agreed but not yet paid to
employees at the point the new legislation is introduced. We will therefore
keep you updated on this matter as and when we hear more.
with a redundancy (this includes voluntary redundancy);