TERMINATION PAYMENTS MIGHT NOT BE TAX FREE

Aug 7, 2017

Fewer termination payments will be able to achieve tax-free status from April 2018 due to new tax legislation.  It’s an area our in-house tax specialists team have been watching carefully.  Currently, Payments In Lieu of Notice (PILONS) are subject to tax and national insurance if there is a contractual right to receive the payment.  If there is no contractual right, then any payment may be considered as damages for breach of contract and the first £30,000 can be paid tax-free.

From April 2018, all PILONS will be taxable and subject to national insurance.

Other termination payments may also be subject to national insurance from April 2018.  Currently, a non-contractual termination payment for compensation for loss of office would be tax free on the first £30,000 of the payment – the balance being subject to tax but not national insurance.  The £30,000 limit will remain for qualifying payments however, from April 2018 the balance over £30,000 will be subject to BOTH tax and employers national insurance.  

Other changes include the removal of relief for any foreign service element of the termination payment.

“We can be certain that both employers and employees will now see increased tax costs on termination payments,” said Afford Bond tax specialist Julie Jarvis.  Before any payment, the effect of the new legislation should be considered as it may affect the structuring of the final payment.  If you need further specialist tax advice, please email Jonathan.Curwen@affordbond.com or use the contact form here on our website.

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