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Changes on the taxation of termination payments confirmed

The government’s consultation confirms that, from April 2018, it will:

  1. remove the distinction between contractual and non-contractual PILONS, meaning that all PILONs will be treated as earnings subject to income tax, employer NICs and employee NICs;

  2. retain the exemption from income tax and employers' and employees NICs for payments relating to termination up to the current threshold of £30,000;

  3. align the rules for income tax and employers' NICs so that employers' NICs will be payable on payments above £30,000.

  4. Foreign service relief will be abolished, except in relation to seafarers, and

  5. legislation will expressly exclude payments for injury to feelings from the exemption for injury payments, except where this amounts to a psychiatric injury or a recognised medical condition.

These changes should all serve to simplify the taxation of termination payments. Additionally, some of the proposals made in the 2015 consultation, including the variable threshold for the exemption based on length of service, limiting the exemption to termination payments made on redundancy and the removal of the exemption for legal costs have been dropped, apparently in view of the consultation responses. This will avoid introducing new complexities into the rules.

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