Employers should be aware of the impending changes to payments in lieu of notice (PILON), National Minimum Wage (NMW) and Statutory Maternity Pay (SMP).
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.
|Category of worker||Hourly rate|
|Aged 25 and above (national living wage rate)||£7.83|
|Aged 21 to 24 inclusive||£7.38|
|Aged 18 to 20 inclusive||£5.90|
|Aged under 18 (but above compulsory school leaving age)||£4.20|
|Apprentices aged under 19||£3.70|
|Apprentices aged 19 and over, but in the first year of their apprenticeship||£3.70|
|Type of payment or recovery||2018 to 2019 rate|
|SMP – weekly rate for first 6 weeks||90% of the employee’s average weekly earnings|
|SMP – weekly rate for remaining weeks||£145.18 or 90% of the employee’s average weekly earnings, whichever is lower|
|Statutory Paternity Pay – weekly rate||£145.18 or 90% of the employee’s average weekly earnings, whichever is lower|
|Statutory Adoption Pay – weekly rate for first 6 weeks||90% of employee’s average weekly earnings|
|SAP – weekly rate for remaining weeks||£145.18 or 90% of the employee’s average weekly earnings, whichever is lower|
|Statutory Shared Parental Pay – weekly rate||£145.18 or 90% of the employee’s average weekly earnings, whichever is lower|
Looking forward, employers and employees alike should take note of change to the calculations of termination packages, which is due to take effect from April 2019.
The current position is that for any payments exceeding £30,000 are exempt from National Insurance contributions. From Aril 2019, we are likely to see that such payments will be subject to employer’s National Insurance contributions, which will push the cost of a settlement package up for employers or reduce them for employees. It remains unclear as to what the overall effect of the change will be, but employers are advised to be aware of the potential change and to review their plans early if redundancies or a restructure may be the cards and in light of the continuing uncertainty around Brexit.
If you feel you require more information relating to the upcoming changes to Statutory Maternity Pay, the National Minimum Wage or pay in lieu of notice, please contact our Employment Department – our team of expert solicitors will be able to assist. Call on 01708 229444 or email us using our contact form.
This article was written by Alexander Pearce, Employment Law Associate at Pinney Talfourd LLP Solicitors. The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice. Specific legal advice should be taken on each individual matter. This article is based on the law as of January 2018.