11 June 2018

Employment tax - were the changes worth it?

How have the changes made to employment tax last year worked out in practice so far?

With the 2018/19 tax year now underway, it’s worth recapping on some of the changes made in the employment taxes arena last year, the effect of which may only being now seen in practice.

Termination payments

The most significant of these changes was introduced with effect from 6 April 2018 and relates to payments made in lieu of notice (PILONs).

Where an employee’s employment contract is terminated, payments made to the employee may be exempt from income tax and national insurance, up to a limit of £30,000; and whether or not the exemption applies depends on precisely what the payment to the employee is being made for.

The exemption will usually apply to non-contractual payments, such as compensation for loss of office, non-statutory redundancy payments and – prior to 5 April 2018 – non-contractual PILONs.

From 6 April 2018, however, all, PILONs are taxable and subject to national insurance, whether or not the employment contract provides for a PILON to be made.

Whilst this somewhat unfortunate change sounds quite straightforward, there are a number of rules for determining how the taxable amount should be calculated. This takes into account how much the employee would have been paid during the period of the notice period they haven’t worked, less any amount of any contractual PILON.

Employers had tended to leave PILONs out of employment contracts because it left open the possibility of a termination payment being made that would be free from income tax and national insurance, but without that advantage, it may now be well worth including PILON clauses as a matter of course.

Foreign service relief

Where an employee had been resident and working overseas, it was often possible for a termination payment to be paid free of income tax, even if it exceeded the £30,000 exempt amount, provided the conditions for foreign service relief had been met.

From 6 April 2018, foreign service relief will no longer be available if the individual is resident in the UK for any part of the tax year during which payment is made.  The payment made will, though, still qualify or the £30,000 exemption is the relevant conditions are met.

Payments for injury or disability

There had been some doubt over whether the income tax exemption available for payments made for injury or disability could be made for injury to feelings.  It has now been put beyond doubt that the exemption will not apply to such payments unless the injury amounts to a psychiatric injury or other medical condition.

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