On 6th April 2018, new legislation will be enforced regarding the tax provisions on PILONs (payments in lieu of notice). This article will aim to give an overview of the current legislation and the new rules that are coming into force.
The Current Position on PILON Tax Provisions
Under the current position, PILON payments arising from a clause in a contract of employment are subject to income tax and national insurance deductions. However, PILON payments which are non-contractual and paid as compensation for loss of notice are not subject to income tax.
The existing legislation has enabled employers to class such non-contractual PILON payments as damages for a breach of the contract, meaning the payment can be made within the £30,000 tax exemption applicable to termination payments.
The new changes abolish the distinction between contractual and non-contractual PILON payments making the position the same for everyone, regardless of how their contract of employment is drafted.
The New Position on PILON Tax Provisions
From the 6th April, any PILON payments will be treated as earnings and therefore will be subject to both income tax and national insurance deductions, regardless of whether there is a contractual right to receive a PILON or not.
The intention is to tax the PILON on the same basis as an employee’s earnings had they worked their notice. It will no longer be possible to include non-contractual PILON payments within the £30,000 exemption and it will be subject to income tax and national insurance.
It is worth noting that the changes affect payments made from the 6th April 2018, and not dismissals from the 6th April. If an employee was dismissed in March, and the payment not made until the end of April, they will fall under the new legislation and be liable to pay tax and national insurance on the PILON, even though they were dismissed prior to the changes. Any employees in the process of negotiating exit payments should bear this in mind.
What Will the Impact Be?
The legislation aims to simplify the position regarding income tax and national insurance deductions on PILON payments.
For employers, the change will increase costs of making a non-contractual PILON payment as they will now be subject to employer national insurance contributions. During negotiations, employers may also find themselves having to increase settlement offers to make up the deductions that will now apply.
For employees, the changes may reduce any overall settlement sum received, with a greater proportion being paid to HMRC. For employees, whose non-PILON payments significantly exceed £30,000 anyway, the change will be irrelevant as the exemption would already have been used up.
For more information regarding how these changes may affect you please get in touch with our employment law experts who will be happy to advise you.
