Employment termination payments

Termination payments: no, not something you pay Arnold Schwarzenegger after a job well done.  Rather the more mundane and grim variety.  Something which most would like to avoid; however, sometimes life has other ideas and you are faced with having to make redundancies or to make the choice to terminate an employment.  During this time, it may be difficult to think about the tax implications of the payment and you simply may not want to.  However, an employment termination payment is most likely to be taxable and HMRC will expect taxpayers to meet their obligations.  

There are several types of employment termination payments: 

• Redundancy 
• Garden leave
• Payment in lieu of notice (PILON) 
• Post-employment notice pay (PENP)

These types of terminations used to suffer different tax treatments. However, from April 2018 this has changed.  Most termination payments are now taxable even if non-contractual. 

Redundancy  

Redundancy payments have specific tax rules.  Generally, redundancy pay-outs are taxed in the excess of the £30,000 threshold.  Employees are usually only entitled to redundancy pay if they have been continuously employed for two years and are over 18.   

Previously, employees who were over the age for state pension would not have been eligible for redundancy pay.  As such, in lieu of the fact that age discrimination is now illegal (took the government a while to figure that out), there is no upper age limit.  Rather, there is an upper limit in terms of length of service which is 20 years. 

A statutory redundancy pay–out will usually to be automatically deemed within the £30,000 threshold.  Redundancy pay is considered an ‘enhanced redundancy pay’, if it is greater than what the statutory redundancy pay that the employee would be entitled to.  This again would fall under the exemption threshold, as long as the pay-out was genuinely to compensate the loss of employment.  

If a larger redundancy package is given maybe for meeting a target or working additional hours, the amount will be liable to tax. 

If the employment ended due to death or illness/disability, then the pay-out will be exempt from income tax.  It should be noted that even when the illness/disability is not incurred directly from the work, it will still fall into the exemption.  From 6th April 2018, injury was updated to include mental health, although injury to feelings is not included in this.    

Garden leave 

Garden leave is usually issued in industries where the leaving employee may take clients with them or could become direct competition with their previous employer.  Let’s use sales for example: if an account manager were to move from one business to another, their clients (with whom it is assumed they have built a solid report with) may choose to move with them.  Companies can place the employee on garden leave for the duration of their notice in an attempt to avoid the loss of any clients. 

Garden leave is processed very similarly to payroll and as such, the employee would receive their salary as normal for their garden leave and would be taxed the same way.  Garden leave differs to post-employment notice pay as employees will usually be unable to start any further roles until it has ended.

Payment in lieu of notice (PILON) 

Payments in lieu of notice are when employees are not expected to work their notice period, however, are paid as if they did.  Before the changes in April 2018, this amount would only be taxed if it was a contractual agreement.  If the payment was outside of the employees’ contract, then it would fall into the termination payment threshold of £30,000; anything under that amount would be tax free.   

Of course, all good things must come to an end and from April 2018, all PILON’s are fully taxable (including NICs) even if they are non-contractual. 

Post-employment notice pay 

This consists of the amount of basic pay (before any employee sacrifices) that the employee would have received had they have worked out their notice.  Sometimes, employees will hand in their notice and their employer may offer for them to leave immediately rather than work their notice.    

Employment termination payments can be very confusing and if you are someone who has always been taxed on PAYE it can be quite daunting. 

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