After being put on hold for the general election, a range of measures put forward earlier this year are now back on the legislative agenda.
Several of these measures relate to termination payments. Originally, new measures were due to apply to all terminations after 6 April 2018. However, the government announced on the 2 November 2017 that it would delay implementation to 6 April 2019. This provides employers with a larger window of opportunity to plan ahead.
What is changing?
For all terminations after 6 April 2019, the proposals are that:
Payments in Lieu of Notice ("PILONs") will be subject to tax and NIC, irrespective of whether a PILON is contractual or non-contractual.
- Currently, it is possible for PILONs to be tax free where they are considered to be non-contractual and, taken together with other deemed ‘termination payments’, fall under £30,000.
- Payments in Lieu of Notice ("PILONs") will be subject to tax and NIC, irrespective of whether a PILON is contractual or non-contractual. Currently, it is possible for PILONs to be tax free where they are considered to be non-contractual and, taken together with other deemed ‘termination payments’, fall under £30,000.
- Employees who have had periods working overseas under the employment being terminated will no longer be able to claim Foreign Service Relief. Depending on the amount of time spent working outside the UK, employees are currently able to exclude either all or part of their termination payment from UK tax and NIC.
- Employers NIC will be due on all taxable termination payments (i.e. termination payments which exceed £30,000). Currently, qualifying termination payments (i.e. payments which qualify for the £30,000 exemption) are not subject to employers (or employees) NIC, even where the payment exceeds £30,000.
Employees will be pleased to know that there are no plans to introduce employees NIC on qualifying termination payments which exceed £30,000.
What is the impact for employers?
Employers should review the new rules where there are terminations, in order to ensure that any termination payments are processed via payroll in a compliant manner. HMRC may impose penalties and interest on any underpayment of tax or NIC.
There will be an increasing cost for employers on terminations as a result of the additional NIC imposed on qualifying termination payments over £30,000. Where employers ‘tax equalise’ or ‘tax protect’ their expatriate employees (i.e. settle tax on behalf of their employees), there is likely to be a significant increase in cost where Foreign Service Relief would have applied.
What should employers do?
Given the upcoming changes, employers should familiarise themselves with the new rules and also factor in the potentially increased cost of any terminations. With regard to the loss of Foreign Service Relief, employers and employees should explore whether it is possible to exempt part of the termination payment under a double tax treaty.
For example, in some circumstances it is possible to use a double tax treaty to argue that the termination payments should be taxed (in part or in full depending on the extent of the overseas work) in the country or countries in which the employee earned income during their employment. This may help reduce the overall tax burden in those cases where the employee worked and was taxed in a country or countries where the tax rate is lower than the UK.
For more information please contact Mark Abbs.