On 5 December 2016, the government published the revised draft Finance Bill 2017 which confirmed its intentions in this respect.
Further to our earlier report, the draft legislation confirms that where an employee does not work their notice, but receives a payment in lieu, their basic pay for that period will be subject to deductions for tax and National Insurance contributions.
The draft legislation remains complex, albeit, not as complex as the earlier version. There is no longer any intention to take account of 'expected bonus income' and such payments shall not be subject to deductions for tax and National Insurance contribution (assuming they are not otherwise contractual payments). The concept of 'post-employment notice pay' has been simplified and no longer involves consideration of benefits that would have been received during the notice period.
The legislation confirms that redundancy payments will always benefit from the £30,000 exemption.
The draft legislation specifically permits HMRC to vary the current £30,000 threshold. It may be that a change in threshold is on the horizon, notwithstanding that this was specifically consulted on and rejected.
The draft legislation is open for consultation until 1 February 2017. However, it is likely the legislation will come into force as drafted, or otherwise with only minor amendments as the clear purpose of this consultation is to ensure that the legislation works, rather than to consider the underlying policy.
The legislation comes into effect from 6 April 2018. Therefore it will be some time before employers need to take action. However, employers should start thinking about the implications of the changes, particularly where reviewing its contractual documentation.
As things stand there is some benefit from omitting a payment in lieu of notice clause out of an employee's contract as this allows such a payment to be made free from deductions and can therefore be a useful negotiation tool. In the future, this will not be the case. Having a contractual right to make a payment in lieu of notice in all cases will therefore be sensible. For example, having such a right prevents issues arising in respect of enforceability of restrictive covenants and is helpful where an employee occupies employer-provided accommodation.