The tax and NI treatment of termination payments currently depend on whether or not they are classed as earnings. This has often not been clear cut and factors such as whether the payments were provided for contractual reasons have had to be considered. For instance, the treatment of payments in lieu of notice (PILONS) and in particular whether or not they qualify for the partial exemption of £30,000, has long been a contentious issue. HMRC therefore issued new rules regarding the tax and NI treatment of termination payments to take effect from 6 April 2018.
Probably the most drastic change is the removal of any grey area for PILONS. From 6 April 2018 it will no longer be relevant to argue such a payment is not provided for in the contract of employment, and indeed the tax considerations for including a clause in the contract will disappear. It will also remove the need to consider whether such payments are customary. Instead these payments will be fully subject to tax and both employers’ and employees’ NI contributions
EX GRATIA PAYMENTS
Payments which are genuinely made to compensate the employee for the loss of their job will continue to qualify for the £30,000 partial exemption. However there will be a change to the NI treatment for any payment in excess of the £30,000 partial exemption. Where previously this would not have been subject to NI contributions, both employers’ and employees’ contributions will now be due. Originally this additional NI liability was to take effect from 6 April 2018, however this has been deferred to 6 April 2019 instead.
To avoid abuse of the disability or injury exemption which removes any tax and NI liabilities on payments (regardless of amount), HMRC have stated that this exemption only applies where there is a psychiatric injury or medical condition. This will prevent the potential for a claim where the individual claims injury to feelings, even though this possibility has effectively been rejected by the Upper Tribunal in Krishna Moorthy v the Commissioners for HM Revenue and Customs  UKUT 0013 TCC