Changes to the taxation of termination payments

From 1 April 2020, termination payments made by employers will be taxed differently, reducing the scope for payments to fall under the £30,000 tax exempt threshold.

The changes

Currently, most ‘termination payments’ made up to £30,000 are covered by the £30k threshold and are paid tax and national insurance free but from next year, the new measures require payments to be split and treated as follows:

• Amounts identified as earnings such as Payments in Lieu of Notice (PILONS) will not be covered by the £30k threshold and are subject to tax and NI
• Genuine termination payments will be covered by the £30k exemption

The objective is to level the playing field and apply income tax & Class 1 employers NI to earnings received under the guise of PILONS in the same way as if they had been earned in the course of employment. The current guidelines allow for a degree of interpretation of termination payments but the new rules aim to remove any ambiguity.

Employers will also be liable to employer’s NI on any part of the termination payment which exceeds £30,000. There is no upper limit for employers under current proposals. Statutory redundancy payments will continue to form part of the £30k exemption limit.

What now?

If you are considering making redundancies, we can advise on the tax effects of your proposed redundancy packages and how the rules will affect both the company and individual employee. Please contact [email protected] or call 01527 558539 to discuss your requirements.

For further information about how we can help your business in terms of employer tax compliance, audit and accounts regulations and optimal tax planning, please visit our website. The rules around compliance change frequently and ensuring your business is up to date with all filing and regulatory requirements is paramount.