Last year the UK Government undertook a consultation process aiming to simplify the way that tax on payments are made on the termination of employment. The results of this consultation process have now been published, along with the draft legislation which is believed to be taking effect from April 2018.

The reason that this consultation took place is that many felt that the existing tax and national insurance calculations on termination pay was very complicated and could be manipulated by employers. This new draft legislation aims to make things clearer and fairer for all, which as a company who offer HR Consultancy in Manchester, we are all for.

The key changes that are being made are as follows:

All Payments In Lieu Of Notice (PILON) To Be Treated Equally

At the moment, any contractual PILONs are taxed the same way that earnings are, whereas non-contractual PILONs are not. Non-contractual PILONS are those payments made by employers which are not an automatic response to termination. This means that when PILONs are made, there has to be some investigating of the employer’s customs and the decision to make the PILON in order for the correct tax decision to be made. This can get quite complicated, as you can imagine.

Under the new legislation, the distinction between contractual and non-contractual PILONS will be removed, and any PILON will now be taxed as if it was earnings.

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Other Payments Received To Be Taxable

As well as PILONs, any other payments made post-employment that would have been treated as earnings if the employee was still employed will now be taxed. This will include expected bonus income, for example. This law will apply whether the employee works out their termination notice, part of it or none at all.

£30,000 Threshold Maintained

During the consultation, it was suggested that there should be a variable threshold for the payment of income tax and national insurance contributions. There was talk of linking it to length of employee’s service and various other items, but this was eventually put aside with the aim of keeping the threshold as clear as possible. Therefore, termination payments of up to £30,000 will remain exempt from income tax, employer national insurance contributions (NIC) and employee national insurance contributions.

Employers NIC above £30,000 to Be Changed

Currently, if the termination pay is above £30,000, the portion of it that is above the £30,000 is subject to income tax only. This has now been changed so that from April 2018, it will also be liable to employers NIC’s as well – but there will be no change to the employee NIC entitlement.

Foreign Service Relief Is To Be Abolished

Foreign Service Relief currently allows termination pay to be completely exempt from income tax for individuals who qualify. This also applies to those who have been working in the UK and have received a termination payment but have also worked for the same employer outside the UK for more than 75% of the past 20 years. From April 2018, this tax relief will be abolished as the Government now believe it to be outdated, given the global workforce we have today. However, those people who have worked abroad will still be covered by the £30,000 threshold.

What Does All This Mean?

This new draft legislation should mean that it is now simpler to understand the law relating to termination pay, as it does drop some of the more complicated proposals.

However, on the flip side, it does mean that terminations will now be more costly for employers. The changes to PILONs and payments above £30,000 will increase the cost of employers NICs and increased financial packages may have to be offered to employees to compensate for the lower net figure they will actually receive under this new legislation.

Over the coming months, we shall no doubt see some ironing out of the draft legislation, so it is definitely one to keep an eye on.

For more information about termination payments or any other help with HR, please call Triple Three Solutions on 0161 300 1214 or send an email to