Apr 16

Employment Law

Posted by gowenstevensadmin on Monday 16th April 2018

On 6 April 2018 the rules relating to tax free payments changed.

Since 1988 Employees have been entitled to receive up to £30,000.00 by way of ex gratia payments, redundancy payments and/or damages for breach of contract. An example of the latter was a payment in lieu of notice (PILON) where the Contract of Employment did not include the right of the Employer ask the Employee to leave immediately in return for the PILON (which in modern Contracts is actually quite rare.)

The Government has now changed the rules on this. Employers must now identify what part of any settlement figure is attributable to a PILON (whether or not the Contract allows them to do that) and apply PAYE and Class 1A National Insurance Contributions to that element of the payment.

The practice, therefore, of “rolling” all payments into one lump sum is now much less easy to defend than previously, not that it was very good practice anyway.

Since, as mentioned above, few modern Contracts fail to have a PILON clause, the impact is likely to be minimal, and it is likely that only those with only very basic (often home-made) Contracts, those with nothing in writing at all, and long serving Employees with old-fashioned Contracts will be affected.

In some ways the impact of the second noteworthy reform, which comes into effect on 6 April 2019, is likely to be greater. From that date Employers will be obliged to deduct Class 1A NICs (employer liability only) from all termination payments above the £30,000 threshold. This does represent a significant extra cost to Employers.

More details on how this is likely to be implemented are expected in a National Insurance Contributions Bill, which will be published later this year.


Paul Edmunds

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