HMRC has confirmed its interpretation of the commencement provisions for the new rules on non-contractual pay in lieu of notice.
Finance (No2) Act 2017 introduced new rules governing non-contractual pay in lieu of notice (PILON). Broadly, these new rules ensure that non-contractual PILONs do not fall within the £30,000 exemption to the extent that they represent “basic pay” that would have been received had the notice been worked (what the legislation refers to as “post-employment notice pay” or “PENP”). Instead the new rules subject this PENP to income tax and NIC.
The changes are due to take effect from 6 April 2018 (i.e. 2018/19). However, what was not immediately clear was the position of payments received during 2018/19 as a result of a termination occurring in 2017/18.
HMRC has now confirmed its view that the new rules only apply to payments made on or after 6 April 2018 where the employment ended on or after 6 April 2018. As such, payments made in 2018/19 pursuant to a termination which occurred in 2017/18 will remain subject to the “old” rules i.e. non-contractual PILONs may be subject to the £30,000 exemption in full, where such payments form part of a termination settlement.
We understand that this point, as well as further details, will be included in guidance to be published shortly by HMRC. Of course, non-contractual PILONs have been subject to HMRC challenge over the years on various grounds such as custom, habit, practice or expectation. HMRC’s argument has been that certain PILONs have the character of earnings and should be taxable as such. As a result, notwithstanding HMRC’s confirmation above, advice should still be sought for termination payments being made both pre and post 6 April 2018.
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