In a previous post, we were less than wholly welcoming to the Government’s proposals for the simplification of the tax and NIC treatment of payments in the context of the termination of employment.  The proposals were put out to consultation in July 2015 and a report on the responses, launching further consultation on the draft legislation, was published yesterday.

Thankfully, the dodgy proposals – that there should be a separate exemption from tax and NICs for payments in respect of wrongful or unfair dismissal and that the main exemption for termination payments would only be available in the case of statutory redundancy – have been kicked into the long grass by a majority of the 109 responses.  Best draw a veil over those then ….

The stated aims of the reforms are to make the taxation of termination payments:

  • simpler for employees and employers to understand and operate;
  • clearer and more certain, so as not to add to the employee’s burden at a difficult time;
  • fairer (so that the fat cats who can afford advice don’t get better tax treatment than the lowly-paid); and
  • not unduly expensive for the Exchequer.


Currently, contractual payments in lieu of notice (PILONs) are taxable, but non-contractual PILONs aren’t, Around two-thirds of respondents said that removal of the distinction would reduce confusion and complexity, so it is proposed that under the new rules all PILONs will be taxable.

Other termination payments

Again, these can be divided into contractual payments, which are currently taxed and non-contractual ones, which aren’t.  Responses in this case were much more evenly split.  A slight majority felt that the distinction was well understood – any contractual or customary payments (such as holiday pay) are ‘from the employment’ and should be taxed, whereas any payments relating to the loss of employment, for example statutory redundancy pay, should not.  The killer was respondents pointing out that if the distinction was removed, many legislative changes would be required to ensure that there was no manipulation of the rules.  As this would increase complexity, the Government has decided to retain this distinction.  However, only payments directly related to the termination will be exempt – reference to the employment contract and other terms and conditions will be required to establish which payments are contractual and therefore taxable.  For any non-contractual termination payments over £30,000, the excess will be taxable.


Currently, termination payments above £30,000 are subject to income tax but not NICs.  There was support from respondents for alignment of tax and NICs, both in this case and generally, and unsurprisingly the Government has plumped for requiring that from April 2018 NICs are to be paid on all termination payments that are subject to tax.

This will add considerable expense to the cost of terminating senior employees.  As companies look to limit the price they pay to senior executives for failure, this adds another 13.8% to the reasons to keep these payments to a minimum.

The £30,000 threshold

Respondents were strongly against the suggestion that the amount of the exemption should be based on length of service, not least because it would be discriminatory against young and part-time workers and those who have a career break.  The lack of support for reducing the threshold and the fact that currently most employees don’t have to pay tax and NICs on their termination payments means the Government is prepared to allow this to remain as is.


There was generally strong support for the current exemptions from tax on termination payments for certain categories of employees, and in particular on payments made in respect of legal costs for advice on termination settlements, to be retained.  However, in the cause of fairness the Government has chosen to remove the “outdated” Foreign Service exemption for payments made from April 2018 and has also clarified that the exemption for payments made on termination of employment due to injury does not extend to injured feelings.


The consultation document sets out draft legislation and as “this is a complex area” welcomes feedback on whether it “will achieve the intended policy effect with no unintended effects” by 5 October to