Simplifying tax and NICs on termination payments

Louise Walker
Louise Walker
Legal Director
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The government has published its plans to change the way in which termination payments are treated for tax and National Insurance contributions (NICs).

The changes proposed are expected to be implemented in April 2018. In summary, the key changes proposed are:

  • To make all payments in lieu of notice (PILONs) taxable, whether or not there is a right to make the payment in a contract of employment.
  • To retain the exemption from income tax and NICs for the ‘loss of office’ element of termination payments up to £30,000.
  • To remove the foreign service relief exemptions for termination payments.
  • To clarify that any compensation for injury to feelings in a termination payment will be taxable to the extent that the £30,000 ‘allowance’ has been exceeded, except where the compensation is for a psychiatric injury or a recognised medical condition.

Taken together, these changes should simplify the taxation of termination payments, although it will bring to an end altogether the possibility of a payment in lieu of notice being treated as damages for breach of contract and therefore being paid tax-free.

The government has invited responses to the draft legislation by 5 October 2016. If you would like to read more or respond to the consultation you can click this link:

Should these changes be implemented, employers may wish to review their contracts of employment to consider whether they should now include a right to make a PILON, if they do not already do so. With no tax advantage being available for omitting the right to make a PILON in the contract, the advantage to employers of including PILON clauses will be that there will be no risk of breaching the contract by making a PILON, thus risking rendering any post-employment provisions unenforceable.


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