Important changes to the taxation of termination payments from April 2018

Currently the only deductions which employers need to make in respect of termination payments in excess of £30,000 is in respect of income tax; no deduction need to be made for employer NICs representing a significant cost saving and financial benefit for employers and employees alike.

Along with a raft of other measures designed to improve the tax take from termination arrangements, the government announced that, from April 2018, there would be an alignment of the tax and NICs regimes by making employers liable to pay Class 1A NICs on the balance of any termination payment above £30,000.  Last month the government decided to implement a one year delay for this measure to come into effect. Subject to one important caveat below, the change will now only apply to termination payments paid in connection with dismissals on or after 6 April 2019.

However, the original April 2018 deadline has been retained in respect of the treatment of non-contractual PILONs. These payments will continue to attract ‘termination payment’ status for tax purposes but deductions for income tax and Class 1 NICs will need to be made on the excess amount over £30,000 from April 2018.

Whichever side of the fence you sit, it is likely to make sound financial and commercial sense to ensure that termination arrangements are concluded prior to 1 April 2018 to take advantage of the preferable tax regime.

If you are presented with a settlement agreement and need to take advice, please contact Tiggy or Emma today to make sure you are best placed financially and professionally for your next career move.

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