From April 2018, taxation of redundancy payments in relation to payments in lieu of notice (PILON) will be changing. The general rule prior to this upcoming alteration was that if an employee’s contract did not contain a PILON clause, and it was not normal practice for the employer to make such payments, then notice could be made without deduction of income tax and national insurance contributions, as long as the sum falls under the tax free threshold of £30,000.
If the employment contract contained a PILON clause, then the notice sum was viewed as earnings and subject to the normal deductions for tax and national insurance contributions as one would expect.
From April 2018, all notice pay will be subject to both tax and national insurance contributions, regardless of the contractual provision. Employers should take note that this will also include bonuses, commission or any other monies that would have arisen during the notice period as set out in the contract of employment or service agreement. As such, employees and employers will not be able to utilise the tax-free threshold of £30,000 for such payments.
HMRC are likely to seek to recover the income tax and national insurance contributions together with penalties and interest owed, should employers seek to classify a PILON as non-taxable.
Where an employee and employer have entered into a settlement agreement, it is common to see a tax indemnity regarding the payment being made, i.e. that the employee is indemnifying the employer for any income tax or employee national insurance contributions, interest and penalties should HMRC determine that tax and/or national insurance is due in respect of the payments made.