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Key change to the tax treatment of termination payments

Employers need to be aware of the upcoming change to the tax treatment of termination payments, which come into force from 6 April 2018.

Current position

If there is a pay in lieu of notice (PILON) clause in an employee’s contract, as this is contractual, this payment is taxed as earnings. If there is no PILON clause in the contract then an equivalent payment can be made which is tax free up to £30,000 as it is considered as breach of contract damages.

Position from 6 April 2018

Employers will be required to treat as earnings any part of a termination payment which reflects basic pay for all or some of the employee’s notice period that is not worked even if there is no PILON clause in the employee’s contract. As a result, this part of the payment will be subject to tax and national insurance contributions in the normal way.

Other parts of the termination payment such as redundancy or ex gratia payments will still have the benefit of the £30,000 exemption as previously. The above changes will have effect for the tax year 2018-19. As stated in the HMRC Employer Bulletin, February 2018 issue:

“This change applies to payment, or benefits received on, or after 6 April 2018 in circumstances where the employment is also ended on, or after 6 April 2018.”

Therefore, where an employee’s employment ends before 6 April 2018 the old rules on termination payments apply (as set-out above under “current position”) even where a termination payment is made on or after 6 April 2018.

About the Author

Simon Shepherd


As Partner and Head of the Employment department Simon undertakes all types of employment work.…

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