HMRC has now published clarification regarding the commencement of tax treatment for payments in lieu of notice (PILON) and the tax treatment of non-statutory redundancy payments.
From 6 April 2018, all PILON will be taxable as earnings, regardless of whether there is a PILON clause within a contract of employment or not. Previously, in the absence of a contractual right to make a PILON, employers could pay employees such a payment without deduction of income tax or National Insurance contributions.
The relevant legislation introducing the change states that the changes have effect for the tax year 2018-2019. This caused uncertainty as to whether this change to the taxation of termination payments would apply to termination payments made on or after 6 April 2018 or only where the termination itself also took place on or after 6 April 2018.
HMRC has now clarified that the change applies “to payments or benefits received on or after 6 April 2018 in circumstances where the employment is also ended on or after 6 April 2018”. In other words, the changes have effect only for termination payments made in tax year 2018-19 and subsequent tax years, where termination also takes place in tax year 2018-19 and subsequent tax years.
HMRC has also stated that all non-statutory redundancy payments can continue to be charged to tax under section 401-416 of the Income Tax (Earnings and Pensions) Act 2003, where the first £30,000 can be paid free from deductions. This appears to widen the legislation. We await the publication of HMRC’s full guidance for further clarification.
With regard to PILON, employers should be aware of the changes on 6 April 2018 when entering negotiating and planning the timeframe of any termination payments. In addition, employers are advised to include a PILON clause within employees' contracts of employment from 6 April 2018 as there is no longer a tax advantage for excluding the clause.
We will update you when further guidance is published.