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The new regime for termination payments

The new regime for termination payments

Termination payments that currently qualify for the £30,000 tax free amount and are paid free of NIC might not qualify for this treatment from 6 April 2018. This article discusses what employers will need to consider moving into the new tax year.

Colin Ben-Nathan


KPMG in the UK


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Currently, contractual Payments In Lieu Of Notice (PILONs) made on termination are subject to income tax and NIC as earnings.

The Apprenticeship Levy is also due on all earnings subject to Class 1 secondary NIC, where the employer is within its scope. This should also be taken into account as part of the overall cost to the employer of terminating an employment.

In contrast, the first £30,000 of non-contractual PILONs, along with certain other payments, may be made tax free.

What’s changing?

New legislation has been introduced to bring the treatment of non-contractual PILONs (and comparable payments) into line with the tax and NIC treatment of contractual PILONs.

Foreign Service Relief on termination payments will also be withdrawn from 6 April 2018 for those who are UK resident (unless they are seafarers).

Where an employment terminates prior to 6 April, but a termination payment is made on or after that date, the pre-6 April rules apply.

What should employers do?

Employers will need to identify what payments or benefits provided on termination are subject to the special rules for ‘termination awards’.

Once these payments are identified, the new rules are applied as follows:

Step 1: Establish the Relevant Termination Award (RTA)

In order to arrive at the RTA, statutory redundancy pay (and certain equivalent payments) will need to be deducted from the termination award.

Step 2: Establish the Post-Employment Notice Pay (PENP)

Broadly speaking, the PENP - calculated according to a formula - is the ‘basic pay’ the employee would have received had they worked their notice period in full.

This is subject to certain adjustments, including a reduction in respect of any contractual PILON or comparable taxable payments received on termination.

Step 3: Compare the RTA and the PENP

The final stage is to compare RTA and PENP.

In essence an amount of the RTA equal to the PENP (or the entire RTA if the PENP is larger) will be subject to income tax and NIC in full.

Any remaining part of the RTA, together with any statutory redundancy payment (and certain other equivalent payments) will be subject to income tax only if, and to the extent, it exceeds the £30,000 threshold.

Any excess over £30,000 is currently subject only to income tax. However, from 6 April 2019 it will also be subject to Class 1A NIC.

How can KPMG help?

In many cases, the calculation of RTA and PENP will be relatively straightforward. However, it will be important for employers to ensure the correct amounts are included in each element of the calculation and that the correct notice period is applied.

In addition, the calculation is unlikely to be straightforward where complex termination packages or international assignees are involved.

KPMG can assist employers to review and confirm the tax treatment of specific termination packages and associated withholding obligations.

If you have any queries, please get in touch with your normal contact or e-mail

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