Spring Statement 2018
On the whole this was a relatively low key statement in respect of employment law as the government probably have a focus on proposals they have accepted and will take forward from the Taylor Review (their response to the consultation came out in February) .
However, there are changes to the taxation of termination payments which can be broken down as follows:
Firstly, to confirm, not all monies paid to an employee under a settlement agreement are tax free.
Currently, If the employer has the right under a contract of employment to make a payment in lieu of notice (PILON) – paying the employee their notice pay and requiring them not to return to work – those payments are subject to PAYE income tax and national insurance contributions in the usual fashion.
What if there isn’t a PILON clause in the contract? If this is the case then the payments up to now have been viewed as a compensation for breach of the employment contract (i.e. not allowing the employee to work their notice) and paid without it attracting national insurance and income tax deductions.
From April 2018 – all payments made in lieu of notice shall be subject to income tax and national insurance contributions.
The other point to note is that from April 2018 where there are bonuses which the employee would have received during the period relevant to their notice period had they not had their employment terminated (i.e. end of financial year bonus for achieving turnover targets), income tax and national insurance contributions will be deducted from those payments.
Awards made at an Employment Tribunal will continue to have the £30,000 tax free allowance for compensation awarded for redundancy payments or other payments due under the contract or for unfair dismissal.
At present, where there is a termination payment made in excess of £30,000 then the amount over and above that amount will be subject to income tax but not national insurance contributions for employee or employer.
From April 2018, after the change being floated for some time, the balance over £30,000 will now be subject to employer national insurance contributions.
This does not apply to employee contributions/deductions, the balance remains tax free for them.
The Government have chosen not to increase the £30,000 tax free threshold of tax freepayment despite inflation over the past 30 years.
The government have provided clarification on the issue of payments made specifically for injury to feelings. From April 2018, payments for injury to feelings will be exempt but only if:
- The damages awarded relate to a psychiatric injury; or
- A medical condition that is recognised.
Where the Employer makes a contribution to the employee’s solicitors in respect of legal fees for obtaining legal advice on a settlement agreement – this payment remains exempt from income tax and national insurance contributions.