In July 2015 the Government published consultation proposals in relation to the tax and National Insurance contributions (NICs) treatment of termination payments. Addleshaw Goddard LLP worked with the GC100 in preparing the GC100's response to that consultation. Following that consultation a response and further consultation has now been published.

Rationale for the changes

The consultation document states that the aim of the proposed changes to the taxation of termination payments are to:

  • Support those who lose their job.
  • Provide certainty for employees and employers.
  • Simplify the existing rules.
  • Ensure that the rules are fair and not open to abuse or manipulation.

Proposed amendments to the legislation

From April 2018, the legislation will be amended to:

  • remove the distinction between the different types of payments in lieu of notice (PILON) (i.e. contractual and non-contractual), so that all PILONs are treated as earnings and subject to income tax and NICs in full. The Government hopes this will provide more clarity and certainty around contractual and non-contractual PILONs;
  • retain the general distinction between contractual and non-contractual termination payments, so that any payments that would have been made in the absence of the termination should be subject to income tax and NICs in full. Anything that is non-contractual (i.e. not determined by reference to the underlying employment contract) will be subject to tax and employer's NICs only on any amount that exceeds £30,000.
  • align the rules for income tax and employer NICs so that employer NICs will be payable on payments above £30,000. The Government believes this change will increase fairness, so that going forward in cases in which individuals must pay tax on termination payments over £30,000, employers will also have to pay employer's NICs. The employee NICs position will remain unchanged and, therefore, any payment paid to any employee that relates solely to the termination of the employment continues to have an unlimited employee NICs exemption;
  • maintain the £30,000 threshold and not introduce a variable threshold based on length of service (as contemplated by the original consultation);
  • remove the foreign service exemption and relief on the basis that this has become outdated and unnecessary. The consultation states that as workforces become more global there is no justification for exceptional treatment of employees who have spent a period working abroad; and
  • clarify that payments in respect of "injury to feelings" will not fall within the definition of "injury" under s406 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA). The Government believes that this provides clarity following divergent judicial decisions and is the correct interpretation of the existing legislation. Therefore, only an injury or disability of a physical or psychological nature that is sufficient to cause the employee to be unable to perform his or her job properly will satisfy the full exemption from tax and s406 of ITEPA.


It appears that the Government has taken into account the responses it received from the previous consultation (including the GC100 response) and has sidelined the more controversial proposals. However, the new proposals will make termination payments more expensive for employers due to the new employer's NIC charge for payments over £30,000.

Employers will need to ensure that those involved in relation to employee termination payments (including HR, payroll and legal) are up to speed with the revised regime coming into effect.

Employers may wish to consider including PILON changes in more junior employees' employment contracts due to the fact that once the changes to the tax position come into effect there will be no potential tax benefit in not including such a provision.

Responses to this consultation on the draft legislation are invited and the consultation closes on 5 October 2016.

Simplification of the tax and National Insurance treatment of termination payments: Government response and consultation on draft legislation