Financial & Legal News

Changes to termination payments and how they affect your business

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New tax rules announced at the 2016 Budget are now in force as of 6 April 2018. Income tax and National Insurance Contributions (NIC) will now need to be made on all payments in lieu of notice (PILONs) upon termination of employment.

Pre 6 April 2018 rules

The prior rules regarding PILONs allowed for the first £30,000 to be exempt from income tax and NIC, providing there was no contractual obligation for the employer to make the payment.

If a contract of employment specified information regarding PILONs, tax would be payable. If the employer had consistently awarded non-contractual PILONs, then it is possible that an implied right may have been created, and tax could potentially be payable as well.

The new rules

Following an announcement in the 2016 Budget, rules that came into force on 6 April 2018 include treating all PILONs, contractual or non-contractual, as earnings, meaning that they will be subject to income tax and NIC.

Employers will need to calculate “post-employment notice pay”, which is the amount of the employee’s basic pay that would have been received for the duration of the notice period, providing that the notice period was not worked. This amount will be subject to income tax and class 1 National Insurance contributions.

These changes will only apply in circumstances where an employee has had their contract terminated after 5 April 2018, meaning that any termination occurring prior to that date will still be subject to the previous rules, even if payment was made after 5 April.

Things to consider for employers

Employers should be aware that there is likely to be an increase in amounts payable during termination settlements. If your business may be affected by these changes, it is important that you conduct a review of your employment settlement policy, and seek legal advice at an early stage.


To discuss any of the issues raised above relating to the dismissal of employees, contact Susan Mayall on 0161 684 6974 or make an enquiry.

Please note that the information and opinions contained in this article are not intended to be comprehensive, nor to provide legal advice. No responsibility for its accuracy or correctness is assumed by Pearson Solicitors and Financial Advisers Ltd or any of its members or employees. Professional legal advice should be obtained before taking, or refraining from taking, any action as a result of this article.

This blog was posted some time ago and its contents may now be out of date. For the latest legal position relating to these issues, get in touch with the author - or make an enquiry now.

Written by Susan Mayall


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