New Employment Law

In the 2016 Budget, the Government announced that it would make changes to the taxation of termination payments. Following a subsequent consultation, HMRC has recently issued a document with draft legislation for consultation. In the light of feedback, the intention is to prepare a second draft of the legislation for publication with the draft Finance Bill 2017.  The closing date for comments is 5 October 2016.

In headline summary, the proposed legislation would apply from April 2018, as follows.


The £30,000 exemption for income tax and employer NICs exemption in relation to termination payments will continue (as will the employee NICs exemption on termination payments). HMRC believe that maintaining the £30,000 threshold means the majority of termination payments will be free from tax and NICs.

However, the exemption which applies “because of the death, disability or injury of the employee” will be amended to clarify that the exemption does not apply in cases of injury to feelings.  Therefore, in order for the “injury” exemption to apply, there will need to be an injury or disability of a physical or psychological nature that is sufficient to cause the employee to be unable to perform his or her job properly;


Currently, PILONs that are included in the employment contract are treated as earnings and subject to income tax and NICs, but non-contractual PILONs are not. The Office of Tax Simplification (OTS) has highlighted that there is no clear policy rationale to treat contractual and non-contractual PILONs differently. Therefore, the proposal is to tax and subject to Class 1 NICs, any payment that the employee would have received it they had worked their notice period, even if the employee is asked to leave employment immediately or part way through their notice period.

The proposed new legislation works by first identifying any payments that should be treated as earnings and any remainder is then subject to the £30,000 threshold. In order to determine which post-employment payments (or proportion of a payment) will be subject to the exemption, employers will need to refer (as they do now) to the employee’s underlying employment contract and other terms and conditions. Any payment that covers part of the existing contractual entitlement, including the notice period even if the employee does not work it, will be taxed and subject to Class 1 NICs as earnings. Anything that is non-contractual will be the termination payment which will be taxed and subject to employer NICs on any amount that exceeds the £30,000 threshold.

The legislation would specifically treat payments such as statutory redundancy or an unfair dismissal award as being subject to the £30,000 threshold.


Under the current rules income tax is due on termination payments above £30,000, but there are no NICs charges. Under the proposals, employer NICs will be payable on termination payments above £30,000.


The consultation paper provides a worked example as follows:

The employee is told that she has to leave her job immediately without working her notice. The employment contract allows for a minimum six month notice period or a PILON. The employee is entitled to:

● gross salary of £48,000 per year; and

● a contractual PILON.

The employment is terminated immediately and the employee receives:

● a £24,000 PILON payment; and

● the sum of £40,000 compensation for loss of office.

Under the new rules, all PILONs and contractual entitlements will be subject to tax and NICs like earnings. The amount of the payment that relates to the notice period (even if it is not worked or only worked in part) is worked out first and anything remaining will be a termination payment.

This means the £24,000 PILON will be taxed and subject to NICs as it relates to her notice period. The £40,000 compensation for loss of office will fall under the termination payment rules; the first £30,000 of the payment will be free from both tax and NICs, leaving £10,000 that will be taxed and subject to employer’s NICs.

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