The response includes draft legislation due to come into force in April 2018. The government stated that the objective is to simplify the rules and avoid manipulation of them by employees and employers.
So, if things remain the same, at the end of the consultation process what will change? As it stands, from April 2018:
The Distinction between Contractual and Non-Contractual Payments in Lieu of Notice (PILON) will be Removed.
All other Post-Employment Payments, which would have been Treated as Earnings if the Employee had Worked their Notice Period, will be subject to Tax and Class 1 NICs.
The £30,000 Exemption for Payments Relating Directly to the Termination of Employment will be Retained.
The Rules for Income Tax and Employer NICs will be Aligned.
The Legislation will Confirm that the Exemption which is Available for Payments made in Respect of 'Disability or Injury' do not Extend to Injured Feelings.
What does it all mean?
In its response, the government heavily focuses on the desire to simplify the rules, make them fairer and prevent manipulation. It remains to be seen whether the reforms will meet these stated objectives, and whether there will be other ramifications once the consultation is over.
It is possible, as envisaged in the response, that the additional cost of employer NICs will mean that payments over £30,000 become less common. In addition, as there will no longer be any distinction between contractual and non-contractual PILONs, there may be no benefit in leaving PILON clauses out of contracts of employment.
The government has invited further input into the consultation and draft legislation. The consultation closes on 5 October 2016.