The following Tax guidance note Produced in partnership with Sam Whitaker of Shearman & Sterling LLP provides comprehensive and up to date legal information covering:
The tax treatment of payments in lieu of notice (PILONs) fundamentally changed under the amendments to sections 402 to 404 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003) (introduced through Finance (No 2) Act 2017) which became effective from 6 April 2018. In broad terms, the amendments mean all PILONs, whether paid pursuant to an (implied or express) contractual PILON provision or not, are fully taxable and subject to both employee and employer National Insurance contributions (NICs). The previous distinction between PILONs which were paid pursuant to an (express or implied) contractual PILON provision (which were treated as fully taxable) and those which were not paid pursuant to a contractual PILON provision (which were capable of benefiting from the £30,000 tax exemption and which were entirely free from NICs) no longer applies. In addition, with effect from 6 April 2020 (such commencement date to be appointed by regulations), changes introduced by the National Insurance Contributions (Termination Awards and Sporting Testimonials) Act 2019 impose an employer Class 1A NICs liability on the amount of a termination payment that exceeds the £30,000 tax exemption threshold (ITEPA 2003, s 403), meaning the employer’s NICs position on termination payments will, with effect from 6 April 2020, mirror that of income tax.
HMRC has stated it considers the new regime to apply only where
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