The End of the Road?

When an employment comes to an end it may be for a variety of reasons. Where it is not the employee’s decision to go there is likely to be a financial package to soften the blow. The package may include salary, holiday pay, redundancy pay, payment in lieu of notice and compensation for loss of office.

Salary and holiday pay are taxable in full because they represent earnings and are taxable as employment income. Likewise certain benefits if they relate to the duties of the employment.

The elusive £30,000 exemption

Other elements of the package may be eligible for a £30,000 tax exemption for termination payments so long as they are triggered by the termination and are not otherwise taxable.

So far so good, but the difficulty often lies in determining whether the £30,000 exemption is available or not. There is a growing body of case law on this point.

The critical question is whether the employee has the right under (or implied under) the terms and conditions of employment to the payment. If the answer is yes then the payment is taxable in full.

The ‘right’ need not be a contractual one and indeed any payment that the employee can ‘reasonably expect’ will be taxable in full.

The exception to the rule is the right to redundancy pay both statutory and non-statutory. This is always treated as a termination payment. However care must be taken to ensure that any payment is a genuine redundancy payment and not, for example, a terminal bonus.

Payments in lieu of notice (PILONs)

This is probably the most difficult area of all in determining the correct treatment. This is at least partly due to the fact that it is not a term recognised in tax law and means different things to different people.

We give you four scenarios where a payment is made in lieu of notice. See whether you think the payment would be taxable in full or eligible for the £30,000 exemption - answers at the end of the article.

  1. Notice is given but not worked (often referred to as ‘gardening leave’) and salary for the period is paid as a lump sum.
  2. The contract provides for PILONs to be provided as an alternative to notice. Would it make any difference if there was no contractual right but payment in lieu is customary?
  3. The employer and employee agree at the time of termination that the employment is to be terminated without proper notice but a PILON will be made.
  4. There are no contractual arrangements for a PILON. The employer terminates the contract and tenders a payment in lieu of proper notice.

As you can see this is something of a minefield. Add to that the fact that the national insurance treatment of the payments does not necessarily mirror the tax treatment and you realise the need for good professional advice. It is much easier to get the words and actions right before rather than after the event. If you need to terminate an employment speak to us sooner rather than later. After all the £30,000 exemption is valuable but don’t assume it will automatically be available just by calling something a termination payment.

Answers
1&2 taxable in full, even if payment is just ‘customary’.
3&4 so long as there is no existing agreement or understanding that a PILON would be made then such payments are eligible for the £30,000 exemption.