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Home // Changes to Taxation of Termination Payments

On August 10th 2016[1] the government published its response to the consultation on termination payments held in July 2015. The government has clarified its proposals for reform and has set out draft legislation. Following this, further consultation will take place until 5 October 2016.

The consultations are being held with a view to simplify taxation payments on termination of employment; these have become so complex that they have invited criticism and generated uncertainty. It was announced that the changes would come into effect from April 2018. The consultation confirms that:

  • The distinction between contractual and non-contractual Payments in Lieu of Notice (PILON’s)  will be removed. As of April 2018 all PILON’s will be treated as being earnings which are subject to income tax and employer/employee national insurance contributions.
  • The current threshold of up to £30,000 will remain and the exemption from income tax and employer/employee NIC’s up to threshold figures will be maintained. The government will bring alignment to the rules surrounding income tax and NICs so that employers’ NICs will only be payable on termination payments above the £30,000 threshold.
  • Apart from injuries amounting to psychiatric medical conditions, tax exemptions for payments for injuries will not include injury to feelings.


It is the government’s aim to have all payments, including PILONs that an employee has received or would have received during the notice period to be treated as general earnings and to be taxable as such.


It is hoped that these revised proposals will help towards the Government’s aim of simplifying the treatment of termination payments. Some of the consequences will be that employees may now receive less than they would have originally received and some departures may be hastened before the new laws come into force.

Employers should be aware of the tax implications and tread cautiously when negotiating deals with departing employees.

The above is the general position of the law as of August 2016 and does not constitute legal advice. Please contact us should you require further information or advice.






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