New rules which seek to address the handling of taxation for termination payments have come into force this month.
HM Revenue & Customs said the changes will “prevent manipulation of the system” following an announcement at Budget 2016.
Under the new rules, employers will be obliged to pay Income Tax and Class 1 National Insurance contributions (NICs) on an element of all termination payments, whether or not they are contractual payments.
The element is the amount of the termination payment that represents payment in lieu of notice (PILON).
The tax office will only seek to tax payments received on or after 6 April 2018, where the employment also ended on or after 6 April 2018.
HMRC said the measure was intended to bring “fairness and clarity to the taxation of termination payments by making it clear that all PILONs are taxable earnings”.
The new rules mean that all employees will pay Income Tax and Class 1 NICs on the amount of basic pay that they would have received if they had worked their notice in full.
In the same announcement, foreign service relief on termination payments has also been removed for all UK residents, apart from seafarers, from 6 April 2018.
For tax advice, please speak to an expert at Grunberg.