Payments in Lieu of Notice (PILON), one aspect of a typical redundancy payment, alongside compensation for loss of employment, is set to lose its tax-free exemption, which currently applies to payments of up to £30,000, where it is not a contractual requirement.
The changes, which are included in draft legislation and set to come into effect from 2018, apply to all PILON apart from those relating to bonuses an employee who has been made redundant would otherwise have received.
In addition to this, employers will have to pay National Insurance contributions on PILON amounts of more than £30,000.
The changes mean that contractual PILON and non-contractual PILON will now be treated in the same way for tax purposes. However, a difference still remains between PILON relating to salaries and those relating to bonuses, meaning employees who receive substantial bonuses will be at a significant advantage.
Mark Cawthron, a tax expert at Wolters Kluwer, said: “This reform to the taxation of termination payments will actually have a pretty fundamental and widespread impact.
“In particular, in most terminations, it will very largely cut away the financial benefits and in the case of larger termination packages, for senior executives or other high earning staff, the new National Insurance liability will be a significant extra cost for employers.”