Changes to tax treatment of termination payments Before 6 April 2018 The current position on payments received on termination of employment has been: Payments in Lieu of Notice (PILONs) • Any payment received in accordance with the employee's contract of employment is subject to income tax and class 1 NICs (with the corresponding deductions under PAYE) – this would include a PILON that is provided for under the contract of employment (either as automatic or discretionary). • Any non-contractual payments are only taxable (but without NICs) to the extent that they exceed £30,000 (under the special rules that tax amounts arising in connection with termination of employment). Where the contract of employment is silent on PILONs, any PILON is treated as noncontractual unless there is very strong "custom and practice" making the payment effectively contractual. Salary sacrifice Employees could elect, if they so wish, to sacrifice all or part of their taxable payment into a nontaxable benefit – principally into a pension contribution (subject to the other conditions around salary sacrifice).
• Foreign service exemption • Where the employee worked for part of the time outside the UK: • If more than 75% of the time was outside the UK, the non-contractual payments were not subject to UK tax • If less than 75% of the time was outside the UK , there is an apportionment of the amount subject to UK tax Changes from 6 April 2018: PILONs • After allowing for any statutory redundancy payment, to the extent that the employee's notice period is not worked:
• an amount corresponding to the employee's basic pay; • excluding bonuses, overtime, commission, etc; and • ignoring any salary sacrifice, is treated as being employment income subject to income tax and NICs. • The intention is to tax (and subject to class 1 NICs) as earnings the basic pay an employee would have earned had the employee worked his or her notice in full. Accordingly, the tax treatment no longer depends on whether there is a contractual PILON in the contract of employment. • Only non-contractual amounts in excess of the above are not subject to NICs and can benefit from the £30,000 exemption.