Labour Research January 2018

Law Queries

Termination payments

Q. Is there still a tax exemption for termination payments under £30,000?

Current taxation rules provide for an Income Tax exemption in relation to non-contractual termination payments for loss of employment of up to £30,000 (Chapter 3 of Part 6 of the Income Tax (Earnings and Pensions) Act (ITEPA) 2003). 

Such termination payments are also generally exempt from employer and employee National Insurance Contributions (NICs).

The Finance Bill 2017 will introduce various amendments to the termination payment tax rules under Chapter 3 of ITEPA. The basic exemption from Income Tax for termination payments up to £30,000 will continue to apply. However, one of the changes is that from 6 April 2018, both Income Tax and employer Class 1A NICs will be payable on any such sums over £30,000. 

The current employee NIC exemption will continue to apply to the entire termination payment, regardless of whether it is more or less than £30,000.

Another change is that all payments in lieu of notice (PILONs) will be taxable and subject to Class 1 NICs. Employers will be required to identify the basic pay the employee would have received working out their notice period, even if the employee only works part of the notice period. 

This amount will be treated as earnings and will not benefit from the £30,000 Income Tax exemption.