Termination Payments | KPMG Global
Share with your friends

Termination Payments – changes to Income Tax and National Insurance contribution (NIC) legislation

Termination Payments

The Finance Bill contains significant changes to the taxation of termination payments which are due to come into effect from 6 April 2018.


Related content

Who should read this? 

Employers who make termination payments, and in particular, tax managers, payroll staff, HR staff and finance staff.

Summary of proposal 

The proposed changes are contained in clause 14 of the Finance Bill and are designed to amend the UK tax treatment of non-contractual pay in lieu of notice (PILON).

Broadly speaking, the Finance Bill clause does this by calculating the amount of salary that the terminated employee would have received had he/she worked the balance of their notice period. This amount is called the post-employment notice pay (PENP) and is then subject to Income Tax and NIC in full, as general earnings.

The balance of the termination payment over and above the PENP is subject to the ‘normal’ rules regarding termination payments (including the £30,000 exemption) and taxed accordingly. 

The Finance Bill clauses also clarify that the exception for termination payments relating to death, injury or disability does not apply in the case of ‘injured feelings’, albeit it does still apply in cases of ‘psychiatric injury’.

Key changes from the draft legislation

Perhaps the key change from the draft Finance Bill published in December 2016 is the omission of the provisions removing the application of foreign service relief (FSR) to termination payments. 

Following discussions with HMRC we understand that these provisions were omitted as the Government has decided to consult further on the approach to abolishing FSR. We expect that the Government will now bring forward legislation to do so as part of the next Finance Bill. We will continue to provide our input into this process.

At the Autumn Statement 2016, the Government also announced that changes would be made so that Employers’ NIC would be charged on all termination payments over the £30,000 threshold where Income Tax was payable. We are expecting the legislation giving effect to this to be included in the NICs Bill 2017.


These measure will take effect from 6 April 2018.

Our view 

While the core idea behind the provisions is relatively straightforward, the mechanics of how the PENP is actually calculated are quite involved; which is ironic given that the consultation was about simplification. The calculations require a high degree of specific information regarding the terminated employee’s remuneration package and the contractual terms agreed between the parties.

As such, a standardised approach to termination payments will not be possible and each termination will need to be considered in the round and on its own merits. This will, by necessity, require more internal resource than is currently the case. 

While the changes are not due to take effect until 6 April 2018, we recommend that employers seek to understand the new rules as soon as possible. As mentioned above, the contractual terms agreed between the parties will impact on how termination payments are taxed post 6 April 2018. Contractual terms agreed now would, therefore, ideally be agreed with the proposed changes in mind.

We welcome the Government’s decision to consult further on the abolition of FSR. In our view, the draft Finance Bill provisions generated anomalous results and it is to be hoped that a more pragmatic solution can be found.


Colin Ben-Nathan +44 (0) 20 7311 3363


Mike Lavan +44 (0)20 7311 1437


© 2019 KPMG LLP, a UK limited liability partnership, and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.

KPMG International Cooperative (“KPMG International”) is a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm.

Connect with us


Request for proposal