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Tax on termination payments

Employers will need to pay Income Tax and Class 1 National Insurance contributions (NICs) on an element of all termination payments from 6th April 2018, whether or not they are contractual payments.

The element that is now chargeable to Income Tax and NICs is the amount of the termination payment that represents payment in lieu of notice (PILON).

This change applies to payments, or benefits received on, or after, 6th April 2018 in circumstances where the employment also ended on, or after, 6th April 2018.

This measure is intended to bring fairness and clarity to the taxation of termination payments by making it clear that all PILONs, rather than just contractual PILONs, are taxable earnings.

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, even if they are not paid a contractual PILON.

This means the tax and NICs consequences are the same for everyone and are no longer dependent on how the employment contract is drafted or whether payments are structured in some other form, such as damages.

Read HMRC - New rules for taxation of termination payments