Changes to the tax treatment of termination payments – from 6 April 2018

The new rules apply where both payment and termination occur on or after 6 April 2018.

The rules apply in particular where termination payments include payments for unworked notice periods and where salary sacrifice arrangements are operated. There are also changes to the foreign service tax exemption.

Where termination payments include payments for unworked notice periods, the new rules mean that the tax treatment of payments in lieu of notice (PILON) no longer depends on whether there is a contractual PILON clause in the contract of employment. The intention of the rules is to tax (and subject to class 1 NICs) as earnings the basic pay an employee would have earned had the employee worked his or her notice in full.

See below for our briefing note which provided more information on the key changes.