Currently the rules around termination payments are quite complicated. Payments In Lieu of Notice also known as PILONs are the biggest area of confusion. These are payments that are made in a when you terminate an employee and do not pay them their contractual notice.
If it is written in your employment contracts PILONs are due, then they need to have tax and national insurance deducted from them. If PILONs aren’t written in your employment contracts AND the payment is under £30,000 then it can be paid tax free. If the payment is over £30,000 then it will need to be taxed.
The government had announced changes to these payments that were to be in place from April 2018, but they have now delayed these to April 2019.
Under these new rules, all termination payments, regardless of amount or employment contracts will be taxable and be subject to national insurance.
Termination payments separate to PILONs under the new rules will continue to benefit from a £30,000 tax and national insurance exemption. But, any payments over this £30,000 limit will be subject to tax and employer only national insurance.
If you need help working out how termination payments will be taxed, and what they will cost you as a business, we are happy to help!